DP17308 Elusive Effects of Fossil Energy Resource Export Embargoes

Author(s): Kai A. Konrad, Marcel Thum
Publication Date: May 2022
Keyword(s): autocratic government, crude oil, depletable resources, export embargo, fossil energy resources, insecure property rights, Natural gas, Safety of International Financial Safe-havens, Sanction, war
JEL(s): D74, H12, H56, K33, Q34, Q35
Programme Areas: Public Economics, Political Economy
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17308

Unlike produced commodities, the extraction and sale of fossil energy resources such as oil or natural gas is an "asset swap": assets stored in the ground are converted into financial assets. The value of assets in the ground is reduced by the amount taken out and sold. This is important for assessing the coercive power of the threat of implementing an export embargo. Even if the country affected by the embargo is ruled by an autocratic kleptocrat, who appropriates all the revenues from resource sales, the sanctioning effect is close to zero in a functioning financial market environment. However, if the autocrat considers her future government power to be at risk and, at the same time, can bunker the extraction proceeds in a financial safe-haven, then the embargo leads to expected wealth losses for the autocrat. The expected wealth losses increase in the difference between the likelihood of retaining power and the wealth security of the financial assets in a safe haven.