Oil depletion and quality of democracy in selected Middle-East countries

Abstract

Oil-abundant countries, Iran, Iraq and the Gulf Cooperation Council (GCC) countries try to improve democratic institutions and to manage their chronically big governments, while experiencing decreased world oil prices. These countries pursue open door policies. Most of the foreign revenues of the region stem from oil and gas exports. Thus, how to manage the production and exports of fossil resources is of great importance. This study aims to analyse the effects of quality of democracy, government size, and the degree of openness in explaining depletion of reserves between 1985 and 2015. After testing for panel unit root and co-integration, a panel data model was estimated considering random effects. The results indicate that democratisation and political stability causes higher depletion of oil. In addition, government size affects depletion in a non-linear form, so that oil production is maximised, when government expenditure accounts for nearly 14% of GDP, on average. Furthermore, trade openness positively impacts on the oil depletion. In this case study, higher oil depletion follows strengthening democratic foundations, resizing the public sector, expanding politico-economic ties with trade partners, and applying the modern technology in the upstream oil industries.