Three essays on the economic impacts of oil and gas extraction: the case of Indonesia

Abstract

This thesis presents three empirical studies examining the economic impacts of natural resource extraction, particularly in the oil and gas sectors. The first study investigates the causal impacts of mining fiscal systems on generating resource rents from oil extraction using the fixed-effects panel model. This study covers 82 oil-producing countries over the period 1970-2015. The findings reveal that a resource rent tax, or its combination with gross royalty tax, outperforms a gross royalty tax alone in generating oil rent. However, the significantly positive impacts of this mining fiscal system are observed only in developing countries, particularly democratic nations and those with higher levels of freedom. These impacts are notably absent in developed nations, non-democratic countries or those with lower levels of freedom. The second study investigates any causal relationship between oil extraction and local economic activities in Indonesian villages where oil wells have been drilled, indicating that oil exploration has been conducted in those villages. The identification strategy in this study relies on the randomness that significant amounts of oil could actually be found and later on commercially extracted in some of those wells. The dataset in this study covers 1,205 villages across Indonesia where oil exploration has been conducted during the period 1900-2012. The study observes the impacts of this oil extraction on the village's economic activities in 2016. The results reveal that the existence of oil extraction has a significantly negative effect on the number of small enterprises established in a village and the number of labourers working in them. Oil extraction, however, has heterogeneity impacts. Its negative effects on local economies only occur in major oil-producing regions, while in minor oil-producing areas, the impacts are absent. This study demonstrates that a natural resource curse can occur at the local level and may be influenced by local institutions. The third study focuses on investigating the spillover effects of natural gas extraction on neighbouring economies, particularly at the district level in Indonesia. For the analysis, this study applies a range of panel difference-in-differences approaches, comparing non-gas-producing districts in rich-gas provinces as the treatment group and non-gas-producing districts in scarce-gas provinces as the control group for the period before and during the gas boom, 2002-2004 and 2005-2015, respectively. This setup exploits government intervention through the Natural Resource Revenue Sharing Scheme, wherein all districts in gas-producing provinces receive amount of revenues from gas production. The results show that non-gas-producing districts in rich-gas provinces have lower Gross Domestic Product (GDP) per capita compared to those in poor-gas provinces. Gas windfall also increases the poverty rate and the number of people living below poverty line. The findings provide evidence that gas windfall is a curse rather than a blessing for the local economies near gas-extraction sites. Show more