Going downstream – An economical option for oil and gas exporting countries?

This paper surveys normative and positive arguments on why oil and gas exporting countries, in particular OPEC members, may expand into downstream industries (e.g. refining, petrochemicals), instead of exporting raw materials. Indeed, local refining can serve as a partial hedge against the vagaries of the oil price. Furthermore, as downstream activities require more complex tasks, the potential to provide economy wide spillovers, thereby fostering overall economic development will be generated. Major explanations including price differentiation (e.g., export taxes), industrial organization (e.g., property rights), efficiency (e.g., vertical integration), local development and spillover effects (e.g., on comparative advantage), risk hedging, climate change, and finally, political economy (e.g., lobbying and empire building) are surveyed from normative and positive aspects, which are then tested against facts. We also highlight the fact that all of those justifications are only efficient if political considerations are put aside. Policies such as granting the national oil companies a monopoly and by very large subsidies on refined products may indeed hinder achieving some of those goals.