Analysis of the Comparative Advantage of Crude Oil Production: Evidence from Panel Data Econometrics

The thesis is structured into three parts. The first part measures the comparative advantage of crude oil in 28 oil-producing countries over the period 1990-2016 using the Normalized Revealed Comparative Advantage (NRCA) index. This part also explores the determinants of the comparative advantage including five explanatory variables with the use of second generation panel data techniques. The empirical result of the NRCA index revealed that not all the 28 sampled oil-producing countries have a comparative advantage in producing crude oil as shown in Appendix (B). The empirical evidence, from the cointegration test, demonstrated a long-run cointegrating relationship among the investigated variables. Further, the Panel ARDL model revealed that in the long run, all the investigated explanatory variables are vital determinants of the comparative advantage of crude oil. Specifically, crude oil price, daily average of crude oil production and institutional quality all contribute significantly in increasing the comparative advantage of crude oil, while domestic demand for crude oil and proven reserve decrease this comparative advantage. The negative effect of the proven reserve seems to align with the philosophy of scarcity rent. In the short run, the effects of the price of crude oil and daily average of crude oil production remain the same. However, proven reserve, domestic demand for crude oil and institutional quality all have insignificant effect. The Granger causality results detected a feedback effect between all the variables. The second part of the thesis examines the relationship between environmental performance, comparative advantage of crude oil and institutional quality in 28 oil producing countries over 13 years using two-step dynamic system GMM method. The GMM estimations demonstrated that the environmental performance and institutional quality along with the conventional factors for comparative advantage are key determinants of the comparative advantage of crude oil. In particular, while environmental performance negatively affects the comparative advantage of crude oil, it is also negatively associated with the comparative advantage of crude oil. These results are in support of the pollution haven hypothesis in resource-based industry. Such results show a bidirectional relationship between environmental performance and comparative advantage of producing crude oil. Further, the results revealed a vital role played by institutional quality in enhancing the comparative advantage of crude oil and environmental performance. More so, the environmental Kuznets curve (EKC) hypothesis is validated in our result. Finally, a substantial difference in the results between OPEC and non-OPEC countries is confirmed by a set of dummy variables. Finally, the third part inspects the differences of the effects of crude oil price, proven reserve of crude oil and daily production of crude oil on the comparative advantage of crude oil in a sample of 10 OPEC countries and 10 non-OPEC countries. the empirical result in the two panels also showed that crude oil price, daily average of crude oil production, and proven reserve have the same effects as found in the second and the third parts of this thesis. run. Regarding the direction of causality flow, bidirectional Granger causality is established between all the investigated variables in both panels. Keywords: Comparative advantage; Crude oil production; Environmental Performance; Institutional Quality; OPEC countries; non-OPEC countries; NRCA index; Panel ARDL model; System GMM method.