By Sergei Guriev, Anton Kolotilin, Konstantin Sonin

As oil prices rise, global oil companies may seem to be making up for previous times when revenues barely covered production costs. However, the oil executives know all too well that high oil prices are a mixed blessing. Echoing the title of Terry Karl s 1997 book, Eni s CEO Paolo Scaroni called this situation the paradox of plenty : while high oil prices bring high cash flows, they also raise the bargaining power of oil producing countries.

Their governments resort to the policies of a 1970's style of resource nationalism riding along the crest of high prices, in the words of Daniel Yergin, the chairman of Cambridge Energy Research Associates (Mouawad, 2006). Governments deny private companies access to new oil fields and nationalise the fields that the private companies have started to develop.

The recent record breaking spike in oil prices has already claimed a number of casualties. In June 2007, ExxonMobil and ConocoPhillips, both major U.S. based oil companies, were forced to abandon their multi billion dollar investments in Venezuela. Some other international majors, including French Total SA, Norwegian Statoil, the UK s BP, and American Chevron, though not squeezed away, had to concede their controlling interests to the state run PDVSA company. Neighbouring Bolivia and Ecuador forced international companies to make similar concessions.

During the same summer, TNK BP, a Russian subsidiary of BP, had to sell a major stake in its oil business to the national gas monopoly Gazprom. Before that, in December 2006, Royal Dutch Shell had to sell a 50% plus one share stake in the Sakhalin 2 oil field to Gazprom after the international major was threatened with license withdrawal by a state environmental agency. In August 2007, the government of Kazakhstan also cited environmental violations to suspend Eni s development of Kashagan, a large oil field.

The issue of forced nationalisations goes back to the most important question in economics: if economists believe in a crucial role of property rights for investment and efficiency, why are the property rights so hard to uphold? The privatisation literature (see a survey in Megginson, 2005) shows that switching to private ownership does increase productive efficiency. Hence, the government should benefit from selling the property rights to the most efficient producer and taxing the revenues.

In the oil sector, the benefits of private owners are even greater than in other industries (see Yergin, 1991, for extensive anecdotal evidence). Due to their economies of scale and better human capital, multinational oil companies are more efficient in the past, expropriations have resulted in losses of output and national income.

Yet, nationalisations of oil companies do happen. In a recent paper (Guriev et al. 2008), we analyse the determinants of oil nationalisations around the world from1960 to2002 (a total of 73 nationalisations). One immediate observation is that the nationalisation of oil companies took place when oil prices were high . Specifically, most nationalisations took place in the 1970s, when oil prices were at historically high levels. Once the oil price came down in the 1980s and 1990s, nationalisations virtually disappeared and re emerged only in the last decade when oil prices climbed back to 1970s' levels.

Oher hand, given the costs of expropriation, it is not immediately clear why a government of an oil producing country would respond to a positive oil price shock with expropriation rather than just with imposing higher taxes. Using taxes contingent on (observable and verifiable) oil prices, the government can preserve oil companies' incentives for investment in new fields and cost reducing technologies.

This straightforward solution, however, relies on the external enforcement of contracts, which is not the case: the government is both an enforcer and a contracting party. Therefore, this contract can only be self enforced. As BP s then CEO recently said, There is no such thing in the [Petroleum] E[xploration] P[roduction] business as a contract that is not renegotiated (Weiner and Click, 2007). The only protection for a private company is the government's desire to benefit from more efficient production in the future and checks and balances that assure that the government in office pursues the long term national interest.

We consider a simple theoretical model of such a self enforced contract our analysis implies a straightforward prediction: when current oil prices are high, (inefficient) expropriations may take place in equilibrium. In this case the immediate prize is too valuable relative to future revenues. Therefore, we should expect more expropriations in periods of higher oil prices. Another prediction is that expropriation is more likely when there are fewer checks on the government so that the government cannot commit to not expropriating.

We test these predictions using data on all the expropriations of foreign owned, oil producing companies around the world in 1960 2002, using and extending the dataset compiled by Kobrin (1984). We focus on oil as the expropriation of an oil company is a high profile event and relatively easy to observe and quantify. Also, oil is a globally traded commodity with a long time series of prices.

We show that expropriations are indeed more likely to take place when oil price (controlling for its long term trend) is high and in countries where political institutions are weak. The results hold for both measures of institutions that we use (constraints on the executive and the level of democracy from the Polity IV dataset). Most importantly, the results hold even if we control for country fixed effects in other words, in a given country, expropriation is likelier in periods of weakened institutions.

Our econometric results are therefore consistent with the conventional wisdom. High oil prices do bring resource nationalism, so they are not as good news for global oil companies as they may seem.

By arrangement with: www.resourceinvestor.com

United kingdom Energy