Oil producing countries' discount rates

Abstract

The small LDCs which own the great bulk of oil resour- ces are rational agents and calculate with short horizons and high discount rates. They have pre-commitments to spend much (or even more than all) of their incomes, hence behave like highly leveraged corporations. They are also undiversified, hence the risk factors are set not by covariance with a diversified portfolio or sources of income, but rather by the variance of the oil income stream itself. Political risk is additional. High discount rates act both to raise and lower the depletion rate, so the net effect is indeterminate without knowledge of costs, not considered here. High discount rates sharply lower the effective elasticity of demand, and lead to a cartel policy of "take the money and run."