Why do oil importers diversify their import sources politically?: evidence from U.S. firm-level data

Mila Kashcheeva and Kevin Tsui ()

No 458, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: International politics affects oil trade. But why? We construct a firm-level dataset for all U.S. oil-importing companies over 1986-2008 to examine what kinds of firms are more responsive to change in "political distance" between the U.S. and her trading partners, measured by divergence in their UN General Assembly voting patterns. Consistent with previous macro evidence, we first show that individual firms diversify their oil imports politically, even after controlling for unobserved firm heterogeneity. We conjecture that the political pattern of oil imports from these individual firms is driven by hold-up risks, because oil trade is often associated with backward vertical FDI. To test this hold-up risk hypothesis, we investigate heterogeneity in responses by matching transaction-level import data with firm-level worldwide reserves. Our results show that long-run oil import decisions are indeed more elastic for firms with oil reserves overseas than those without, although the reverse is true in the short run. We interpret this empirical regularity as that while firms trade in the spot market can adjust their imports immediately, vertically-integrated firms with investment overseas tend to commit to term contracts in the short run even though they are more responsive to changes in international politics in the long run.

Keywords: United States; International trade; International relatiolns; Petroleum industry; Imports; Foreign investments; Energy resources; International politics; FDI-based imports; Hold-up risk; Energy security (search for similar items in EconPapers)
JEL-codes: F13 F51 F59 Q34 (search for similar items in EconPapers)
Date: 2014-02-01
New Economics Papers: this item is included in nep-bec, nep-ene, nep-int and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 458. 2014-02-01

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