Do Oil Producers Extract More as They Become Richer? A Natural Experiment Using Unanticipated Reserve Discoveries

Abstract

The relationship between oil reserves and oil extraction has recently become of interest to the research community. Current empirical literature lacks a clear identification strategy that addresses potential endogeneity problem. This study takes advantage of (arguably) exogenous reserves discoveries to identify the effect of an expansion in reserves on oil production. Contrary to optimal exercise time of an option to wait, the paper finds overall an immediate extraction of new reserves after one year from the time of reserves discovery. Conversely, the OPEC countries prefer to leave the new reserves in the ground for at least 3 to 4 years after the discovery. This may be explained by opposite incentives in place in OPEC vs. fringe countries as a result of differences in their political structure. We provide evidence that is not consistent with an argument that low extraction of OPEC countries is the results of mis-reporting of their reserves sizes.

Keywords: Oil, Extraction, Reserves, OPEC

JEL Classification: Q32, Q34, Q48