Insecure Property Rights May Be Helping to Maximize Current Russian Oil Output…

Michael Giberson

…but not in a good way. The Streetwise Professor deploys a little Property Rights Economics 101 lesson as he contrasts the development of petroleum resources in Russia and China:

An article on the McClatchy wire states that the Russian oil industry is facing a dire future due to “the practice of reaping quick profits and ignoring long-term interests.” This is no big surprise to those who understand the effects of insecure property rights on the incentives to (a) invest in specific assets, and (b) take as much as you can grab today because it may not be yours tomorrow. There are few assets more specific than an oil well. If you invest wisely today to maximize the present value of the well’s future output, that does you no good if you’re not around to claim those future flows (because, for instance, you’re rotting in a jail in Chita.) So, to hell with the future-maximize what you can produce today, even though that impairs the well’s long run value….

The contrast with China is of some interest. Formal property rights are absent in China too, but China’s rulers act more like “stationary bandits” (in Mancur Olson’s felicitous phrase) with an “encompassing” interest in the long run health of the nation’s economy. They apparently figure they have a high probability of being around for awhile, and therefore temper their short term exactions in order to enhance their future take. Thus, property rights are informally protected and relatively secure (by comparison to the Chinese past and Russia, but not to the US.)

Russia’s rulers, by contrast, act like Olson’s “roving bandits.” Apparently insecure in their future prospects, they lean towards taking today and letting the future take care of itself. The Putinists probably have a longer view than the pirates of the 90s, but they clearly have shorter time horizons than their Chinese counterparts.

Of course when I say in the title that “insecure property rights may be helping to maximize current Russian oil output,” emphasis should be on the word current. Overall production will be lower in the long run because of the incentives to mismanage the resource.