## _wp08198

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---

### I. Introduction
- Purpose: discuss an alternative methodology to assess whether real exchange rates of countries with large stocks of non-renewable resources are in equilibrium, based on consumption smoothing and a simple intertemporal model of the current account.
- Rationale: oil-exporting countries face expected falls in future income from nonrenewable oil resources; consumption smoothing implies current-account surpluses may be needed to finance future consumption.
- Key requirement: estimation of the present value of future income from oil production (oil wealth), using geological survey data on subterranean oil reserves rather than naive infinite-horizon extrapolations.
- Empirical summary (at stated oil prices):
  - At US$67 per barrel (summer 2007): consumption-smoothing and medium-term predictions comparable for Republica Bolivariana de Venezuela, Malaysia and Russia; for Kuwait consumption-smoothing non-oil current account deficit far larger than medium-term prediction; for Saudi Arabia and United Arab Emirates the opposite holds.
  - At US$124 per barrel (summer 2008): consumption-smoothing non-oil current account deficits far larger than medium-term predictions for all sample countries except Malaysia.

### II. Basic structure of the alternative methodology
- Contrast with standard staff approach:
  - Standard: distinguish oil exporters by sensitivity of current account to oil balance; norms based on fiscal balance, demographics, net foreign assets, growth; flow-based and do not indicate duration of oil surpluses.
  - Problem: a large current oil surplus does not indicate sustainability if oil reserves are near depletion.
- Intertemporal approach building blocks:
  - an assessment of the stock of oil reserves and valuation of these stocks
  - measures of the present discounted value of non-oil cash flow
  - a reasonable estimate for the return on investment and the discount rate
  - a measure of consumption tilting
  - a long-run estimate of the non-oil current account
- Conceptual result: oil-exporting countries consume the return on total wealth (oil wealth + non-oil wealth or PDV of future non-oil cash flow) with a correction for consumption tilting to maintain real total wealth for future generations. If consumption-smoothing implied non-oil current account ≈ underlying non-oil current account (adjusted for cyclical factors), no exchange rate adjustment is needed.

### III. Model (key equations and mechanics)
- Preferences: CRRA utility; deterministic treatment adopted (no stochastic uncertainty) to avoid intractability and to produce a lower bound on optimal current account under uncertainty.
- Euler equation implication: if (1)1rβ+= (equivalently 1λ=) then optimal consumption is time-flat (no consumption tilting).
- Definitions and notation preserved as in source:
  - per capita national cash flow: % tjt YIGT =−− −
  - consumption tilting factor: ω = /(1)rrωλ=+−
- Optimal consumption and current-account expressions:
  - Optimal per capita consumption given by equation (3) (consumption equals annuity value of wealth adjusted by ω).
  - Optimal current account equals consumption-smoothing current account plus consumption tilting (equations (4) and (5)).
- Oil-economy partitioning:
  - Output partition: ON t t YY =+ (oil and non-oil)
  - Oil current account expressed as fraction α of oil output: (1) OO tt CAYα=− with α ∈ [0,1)
  - Optimal non-oil current account components (equation (7)):
    - return on oil wealth (present discounted value of per capita oil production)
    - PDV of future changes in per capita non-oil cash flow (N t PDV)
    - current domestic consumption of oil (α)
    - consumption tilting component (ω)
- Oil production and reserves:
  - Future aggregate oil production equals constant fraction δ of initial oil reserve O0 R; reserves exhausted by time 1/Tδ=.
  - Per capita oil production declines over time if population growth n > 0; total reserves decline monotonically to zero.
  - Oil-wealth (per capita) expression: equation (9); W O t for t = 1,2,...,T and W O 0 at time 0 given by equation (10).
- Non-oil cash flow dynamics:
  - AR model for per capita changes in real non-oil cash flow: equation (11) including per capita changes in real value of oil reserve / O RL Δ as control.
- Estimation of ω:
  - From cointegrating regression of national cash flow on consumption using stationarity of optimal consumption-smoothing current account.

### IV. Estimation: sample, parameters, and results
- Sample countries: Kuwait, Saudi Arabia, United Arab Emirates, Russia, Republica Bolivariana de Venezuela, and Malaysia (benchmark with limited reserves).
- Data sources: oil reserves from British Petroleum Statistical Review (2006 edition); other databases (WEO, WDI) and IMF staff estimates.
- Baseline assumptions:
  - five-year average oil price from summer 2007 WEO forecast: $67.4 per barrel (rounded in text as US$67 per barrel in many comparisons)
  - baseline real discount rate: 4 percent
- Population growth:
  - WDI 20-year forecasts; Middle Eastern countries projected between 2.2 and 2.5 percent per annum; Malaysia and Republica Bolivariana de Venezuela projected at "1 ½ percent per annum"; Russia projected to decline slightly.
- Extraction-rate assumptions:
  - Venezuela, Kuwait, Saudi Arabia, United Arab Emirates: assume 1 percent per annum (reserves exhausted within 100 years).
  - Malaysia and Russia: reserves assumed to be fully extracted within twenty years.
- Historical extraction rates (2004–06 avg as percent of reserves; Table 1):
  - Venezuela 1.32
  - Kuwait 0.94
  - Malaysia 6.68
  - Russia 4.38
  - Saudi Arabia 1.50
  - United Arab Emirates 1.04
  - Median 1.41
- Oil wealth and annual return (Table 2; US$ billions and percent of 2012 GDP; baseline r = 0.04, oil price US$67 per barrel, extraction periods 20–100 years):
  - Venezuela: Oil Wealth 1317.6; Annual Return 15.9
  - Kuwait: Oil Wealth 1671.5; Annual Return 19.5
  - Malaysia: Oil Wealth 212.2; Annual Return 2.5
  - Russia: Oil Wealth 3125.0; Annual Return 9.3
  - Saudi Arabia: Oil Wealth 4351.7; Annual Return 16.4
  - United Arab Emirates: Oil Wealth 1610.6; Annual Return 11.5
- Estimation of PDV of non-oil cash flow:
  - Second-order autoregressive model (Table 3) estimated 1980-2006 (exceptions: Kuwait 1993-2006; Russia from 1991).
  - Key coefficients and statistics (preserved from Table 3):
    - Change in real non-oil cash flow (t-1): coefficient -0.15, standard error 0.15
    - Change in real non-oil cash flow (t-2): coefficient -0.15, standard error 0.07 **
    - Change in real oil wealth (t-1): 0.001, standard error 0.00
    - Change in real oil wealth (t-2): 0.001, standard error 0.00
    - Country dummies: Venezuela -0.01 (0.01), Kuwait 0.028 (0.04), Malaysia 0.028 (0.01)***, Russian Federation 0.032 (0.01)**, Saudi Arabia -0.01 (0.01), United Arab Emirates 0.001 (0.01)
    - Number of observations 118; R squared 0.16
- Consumption tilting estimates (Table 4):
  - Phillips-Perron p-values for stationarity:
    - Venezuela 0.8902; Kuwait 0.6801; Malaysia 0.340; Russian Federation 0.070; Saudi Arabia 0.8402; United Arab Emirates 0.9102
  - Chi-squared statistics testing coefficient ≠ 1 (consumption tilting):
    - Venezuela 0.4; Kuwait 11.41; Malaysia 13.1 ***; Russian Federation 15.2 ***; Saudi Arabia 1.04; United Arab Emirates 0.92
  - Interpretation: consumption tilting occurs for Malaysia and Russia with consumption tilted toward the future in both countries.
- Domestic oil consumption corrections:
  - Estimated as difference between oil output and oil exports (upper bound since includes oil investment) for Kuwait, Saudi Arabia, United Arab Emirates, Republica Bolivariana de Venezuela.
  - Values: almost zero for United Arab Emirates; averaged between 4 and 5 percent of GDP for Kuwait, Saudi Arabia, and Republica Bolivariana de Venezuela.
  - For Malaysia and Russia, BP oil consumption figures imply almost 6 percent of GDP for Malaysia and 4 ½ percent of GDP for Russia.
- Components of equilibrium non-oil current account (Table 5; components in percent of 2012 GDP; columns preserved as in source):
  - Venezuela: [1] -15.9; [2] 15.0; [3] 0.0; [4] -8.2; final -10.6
  - Kuwait: [1] -19.5; [2] 7.0; [3] 0.0; [4] 15.1; final -14.9
  - Malaysia: [1] -2.5; [2] -26.3*; [3] -26.3; [4] 36.5*; final 13.4
  - Russia: [1] -9.3; [2] -33.3*; [3] -33.3; [4] 29.9*; final -8.0
  - Saudi Arabia: [1] -16.4; [2] 13.2; [3] 0.0; [4] -12.3; final -12.4
  - United Arab Emirates: [1] -11.5; [2] 0.7; [3] 0.0; [4] -21.1; final -11.5
  - Note: Table 5 footnote: country-specific constants significant denoted by an asterisk and included in calculation; insignificant terms set to zero.
- Aggregate statement from text: all countries except Malaysia should be running large non-oil current account deficits, ranging from about 8 percent of GDP for Russia to 17 percent of GDP for Kuwait.

### V. Sensitivity tests of the annual return on oil wealth
- Sources of uncertainty in oil reserve estimates:
  - Cross-agency differences can be material (example: Russia estimates range from ~69 to 120 billion barrels; BP latest estimate about 80 billion barrels).
  - Substituting highest Russia reserve estimate raises oil return by about 4 ½ percentage points to 14 percent of GDP (text statement).
- Historical revisions in reserve estimates (Table 6: percent differences comparing BPI and Oil and Gas Journal benchmarks):
  - 1996 (percent differences in source): Venezuela 12.66; Kuwait 2.66; Malaysia 14.2; Russia 32.8; Saudi Arabia 1.06; United Arab Emirates -0.31; Median 1.86 (1996) and 2.16 (2001) reported in notes.
  - Median cross-country disparity between most recent BPI estimate (June 2007) and Oil and Gas Journal for 1996 is 1.9 percent; for 2001 is 2.2 percent.
- Sensitivity to discount rate and oil price (Table 7: Annual return on oil wealth, percent of 2012 GDP):
  - Baseline (Oil price at US$67; discount rate 4%): Venezuela 15.9; Kuwait 19.5; Malaysia 2.5; Russia 9.3; Saudi Arabia 16.4; United Arab Emirates 11.5
  - Oil price at US$67; discount rate at 3%: Venezuela 12.4; Kuwait 8.6; Malaysia 1.6; Russia 7.5; Saudi Arabia 9.6; United Arab Emirates 6.7
  - Oil price at US$25; discount rate at 4%: Venezuela 6.0; Kuwait 7.4; Malaysia 0.9; Russia 3.4; Saudi Arabia 6.2; United Arab Emirates 4.4
  - Oil price at US$124; discount rate at 4%: Venezuela 29.6; Kuwait 36.8; Malaysia 4.6; Russia 17.0; Saudi Arabia 30.8; United Arab Emirates 21.6
- Key sensitivity textual findings:
  - Lowering discount rate from 4 to 3 percent reduces estimated annual return on oil wealth; largest effect for Kuwait (near 20 percent of GDP at 4 percent discount falls below 9 percent at 3 percent).
  - Valuing oil wealth using average real oil price over 1985-2000 (about US$25 per barrel) yields much lower returns than baseline.
  - Valuing oil wealth using WEO medium-term forecast (US$124 per barrel) yields much higher returns.

### VI. Equilibrium non-oil current account assessment
- Historical fit:
  - Model replicates historical non-oil current account behavior well for Republica Bolivariana de Venezuela, Saudi Arabia, United Arab Emirates, and Malaysia since the Asian crisis; does not replicate Kuwait and Russia.
- Medium-term comparison (IMF staff projections, 2007-2012):
  - Projected deterioration in non-oil current accounts across all countries compared to recent past, with sizeable declines in Kuwait, Saudi Arabia, and Russia.
  - Projected non-oil current account deficits in 2012 (percent of GDP, IMF staff projection text):
    - Kuwait ~15 percent of GDP
    - Saudi Arabia ~22 percent of GDP
    - Russia ~8 percent of GDP
    - United Arab Emirates and Republica Bolivariana de Venezuela ~14-16 percent of GDP (fairly stable)
    - Malaysia surplus projected to fall to ~11 percent of GDP in 2012
- Sensitivity of equilibrium non-oil current account to oil prices and discount rates (Table 8; values in percent of 2012 GDP):
  - Oil prices at 1985-2000 historical average; discount rate 4%:
    - Venezuela -10.6
    - Kuwait -14.9
    - Malaysia 13.4
    - Russia -8.0
    - Saudi Arabia -12.4
    - United Arab Emirates -11.5
  - Oil prices at summer 2007 WEO levels; discount rate 3%:
    - Venezuela -7.1
    - Kuwait -3.9
    - Malaysia 14.3
    - Russia -6.2
    - Saudi Arabia -5.5
    - United Arab Emirates -6.7
  - Oil prices at summer 2008 WEO levels; discount rate 4%:
    - Venezuela -24.3
    - Kuwait -32.2
    - Malaysia 11.3
    - Russia -15.7
    - Saudi Arabia -26.8
    - United Arab Emirates -21.6
  - Additional scenario: oil prices at summer 2007 WEO levels; discount rate 4% (primary baseline in text): matches first column of Table 8 (values preserved above).
- Key sensitivity conclusions:
  - At US$67 per barrel, Saudi Arabia and United Arab Emirates show sizeable gaps (≥4 percentage points of GDP) between consumption-smoothing equilibrium and medium-term projection (non-oil current account below equilibrium).
  - At US$67 per barrel and discount rate 3 percent, gaps grow and Kuwait and Venezuela become notably below equilibrium.
  - Valuing oil at historical low average (1985-2000, US$25) makes equilibrium non-oil current accounts stronger (less negative) than medium-term forecasts.
  - Valuing oil at US$124 makes equilibrium non-oil current accounts considerably weaker (more negative) than medium-term forecasts for all countries except Malaysia.
  - For Saudi Arabia, using BP data implying domestic oil consumption of 9 percent of GDP (rather than 4 percent used) would make equilibrium non-oil current account comparable to underlying non-oil current account even at current oil prices.

### VII. Conclusions and interpretation
- Deliverable: an intertemporal consumption-smoothing framework to estimate equilibrium non-oil current accounts for oil exporters; suited especially to countries with large oil wealth stocks.
- Empirical fit: captures past non-oil current account behavior for Republica Bolivariana de Venezuela, Saudi Arabia, United Arab Emirates, and Malaysia (since Asian crisis); fails for Kuwait and Russia.
- Sensitivity and caveats:
  - Estimates are highly sensitive to parameter choices: discount rates, population growth, oil price profile, extraction rate, and oil reserve estimates.
  - The stock-based valuation of oil wealth implies high sensitivity to permanent price shocks; this approach is more sensitive to permanent shocks than flow approaches.
  - The methodology abstracts from precautionary saving induced by oil-price volatility; thus the estimated equilibrium current account likely understates the optimal current account balance, especially for major oil producers.
  - Recommendation: use this stock-based consumption-smoothing methodology in tandem with the IMF macroeconomic balance approach.
- Overall empirical synthesis from text:
  - Using oil prices prevailing in summer 2007 (US$67 per barrel), consumption-smoothing and predicted non-oil current accounts comparable for Republica Bolivariana de Venezuela, Kuwait, Malaysia and Russia; for Saudi Arabia and United Arab Emirates equilibrium non-oil current account deficit significantly less than projected outcome.
  - Valuing oil at WEO medium-term forecast (US$124) yields equilibrium non-oil current accounts for all countries (except Malaysia) considerably weaker than medium-term forecasts.
  - Valuing oil at the 1985-2000 average (US$25) yields equilibrium non-oil current accounts for all countries below the medium-term forecasts.

*IMF Working Paper _wp08198 - References (content extracted from embedded PDF chapters and tables in the provided source).*

### References..............................................................................................................

### _wp08198 - References..............................................................................................................

### I. INTRODUCTION
- Purpose: discuss an alternative methodology to assess whether real exchange rates of countries with large stocks of non-renewable resources are in equilibrium, based on consumption smoothing and a simple intertemporal model of the current account.
- Rationale: oil-exporting countries face expected falls in future income from nonrenewable oil resources; consumption smoothing implies current-account surpluses may be needed to finance future consumption.
- Key requirement: estimation of the present value of future income from oil production (oil wealth), using geological survey data on subterranean oil reserves rather than naive infinite-horizon extrapolations.
- Empirical summary (at stated oil prices):
  - At US$67 per barrel (summer 2007): consumption-smoothing and medium-term predictions comparable for Republica Bolivariana de Venezuela, Malaysia and Russia; for Kuwait consumption-smoothing non-oil current account deficit far larger than medium-term prediction; for Saudi Arabia and United Arab Emirates the opposite holds.
  - At US$124 per barrel (summer 2008): consumption-smoothing non-oil current account deficits far larger than medium-term predictions for all sample countries except Malaysia.

### II. BASIC STRUCTURE OF ALTERNATIVE METHODOLOGY
- Contrast with standard staff approach:
  - Standard: distinguish oil exporters by sensitivity of current account to oil balance; norms based on fiscal balance, demographics, net foreign assets, growth; flow-based and do not indicate duration of oil surpluses.
  - Problem: a large current oil surplus does not indicate sustainability if oil reserves are near depletion.
- Alternative (intertemporal) approach building blocks:
  - an assessment of the stock of oil reserves and valuation of these stocks
  - measures of the present discounted value of non-oil cash flow
  - a reasonable estimate for the return on investment and the discount rate
  - a measure of consumption tilting
  - a long-run estimate of the non-oil current account
- Conceptual result: oil-exporting countries consume the return on total wealth (oil wealth + non-oil wealth or PDV of future non-oil cash flow) with a correction for consumption tilting to maintain real total wealth for future generations. If consumption-smoothing implied non-oil current account ≈ underlying non-oil current account (adjusted for cyclical factors), no exchange rate adjustment is needed.

### III. MODEL (SUMMARY OF KEY EQUATIONS AND MECHANICS)
- Preferences: CRRA utility; deterministic treatment adopted (no stochastic uncertainty) to avoid intractability and to produce a lower bound on optimal current account under uncertainty.
- Euler equation implication: if (1)1rβ+= (equivalently 1λ=) then optimal consumption is time-flat (no consumption tilting).
- Definitions:
  - per capita national cash flow: % tjt YIGT =−− −
  - consumption tilting factor: ω = /(1)rrωλ=+− (notation preserved as in source)
- Optimal consumption and current-account expressions:
  - Optimal per capita consumption given by equation (3) (consumption equals annuity value of wealth adjusted by ω).
  - Optimal current account equals consumption-smoothing current account plus consumption tilting (equations (4) and (5)).
- Oil-economy partitioning:
  - Output partition: ON t t YY =+ (oil and non-oil)
  - Oil current account expressed as fraction α of oil output: (1) OO tt CAYα=− with α ∈ [0,1)
  - Optimal non-oil current account components (equation (7)):
    - return on oil wealth (present discounted value of per capita oil production)
    - PDV of future changes in per capita non-oil cash flow (N t PDV)
    - current domestic consumption of oil (α)
    - consumption tilting component (ω)
- Oil production and reserves assumptions:
  - Future aggregate oil production equals constant fraction δ of initial oil reserve O0 R; reserves exhausted by time 1/Tδ=.
  - Per capita oil production declines over time if population growth n > 0; total reserves decline monotonically to zero.
  - Oil-wealth (per capita) expression: equation (9); W O t for t = 1,2,...,T and W O 0 at time 0 given by equation (10).
- Non-oil cash flow dynamics:
  - AR model for per capita changes in real non-oil cash flow: equation (11) including per capita changes in real value of oil reserve / O RL Δ as control.
- Estimation of ω:
  - From cointegrating regression of national cash flow on consumption using stationarity of optimal consumption-smoothing current account.

### IV. ESTIMATION (SAMPLE, PARAMETERS, AND RESULTS)
- Sample: Kuwait, Saudi Arabia, United Arab Emirates, Russia, Republica Bolivariana de Venezuela, and Malaysia (benchmark with limited reserves).
- Data sources: oil reserves from British Petroleum Statistical Review (2006 edition); other specified databases (WEO, WDI) and IMF staff estimates.
- Baseline oil price and discount rate:
  - five-year average oil price from summer 2007 WEO forecast: $67.4 per barrel (rounded in text as US$67 per barrel in many comparisons)
  - baseline real discount rate: 4 percent
- Population growth: WDI 20-year forecasts; Middle Eastern countries projected between 2.2 and 2.5 percent per annum; Malaysia and Republica Bolivariana de Venezuela projected at "1 ½ percent per annum"; Russia projected to decline slightly.
- Extraction rates used:
  - For Republica Bolivariana de Venezuela, Kuwait, Saudi Arabia, United Arab Emirates: assume 1 percent per annum (reserves exhausted within 100 years).
  - For Malaysia and Russia: reserves assumed to be fully extracted within twenty years.
- Table 1 (extraction rates 2004-06 avg as percent of reserves): country-specific extraction rates (preserved as in source):
  - Venezuela 1.32
  - Kuwait 0.94
  - Malaysia 6.68
  - Russia 4.38
  - Saudi Arabia 1.50
  - United Arab Emirates 1.04
  - Median 1.41
- Oil wealth and annual return (Table 2; US$ billions and percent of 2012 GDP; baseline r = 0.04, oil price US$67 per barrel, extraction periods 20–100 years):
  - Venezuela: Oil Wealth 1317.6; Annual Return 15.9
  - Kuwait: Oil Wealth 1671.5; Annual Return 19.5
  - Malaysia: Oil Wealth 212.2; Annual Return 2.5
  - Russia: Oil Wealth 3125.0; Annual Return 9.3
  - Saudi Arabia: Oil Wealth 4351.7; Annual Return 16.4
  - United Arab Emirates: Oil Wealth 1610.6; Annual Return 11.5
- Estimation of PDV of non-oil cash flow:
  - Second-order autoregressive model (Table 3) estimated 1980-2006 (exceptions: Kuwait 1993-2006; Russia from 1991).
  - Key empirical findings (Table 3 coefficients and significance preserved):
    - Change in real non-oil cash flow (t-1): coefficient -0.15, standard error 0.15
    - Change in real non-oil cash flow (t-2): coefficient -0.15, standard error 0.07 **
    - Change in real oil wealth (t-1): 0.001, standard error 0.00
    - Change in real oil wealth (t-2): 0.001, standard error 0.00
    - Country dummies: Venezuela -0.01 (0.01), Kuwait 0.028 (0.04), Malaysia 0.028 (0.01)***, Russian Federation 0.032 (0.01)**, Saudi Arabia -0.01 (0.01), United Arab Emirates 0.001 (0.01)
    - Number of observations 118; R squared 0.16
- Consumption tilting estimates (Table 4) via cointegration (Phillips-Perron p-values and chi-squared test):
  - p-values for stationarity (Phillips-Perron): Venezuela 0.8902; Kuwait 0.6801; Malaysia 0.340; Russian Federation 0.070; Saudi Arabia 0.8402; United Arab Emirates 0.9102
  - Chi-squared statistics testing coefficient ≠ 1 (consumption tilting): Venezuela 0.4; Kuwait 11.41; Malaysia 13.1 ***; Russian Federation 15.2 ***; Saudi Arabia 1.04; United Arab Emirates 0.92
  - Interpretation: consumption tilting occurs for Malaysia and Russia with consumption tilted toward the future in both countries.
- Domestic oil consumption corrections:
  - Estimated as difference between oil output and oil exports (upper bound since includes oil investment) for Kuwait, Saudi Arabia, United Arab Emirates, Republica Bolivariana de Venezuela.
  - Values: almost zero for United Arab Emirates; averaged between 4 and 5 percent of GDP for Kuwait, Saudi Arabia, and Republica Bolivariana de Venezuela.
  - For Malaysia and Russia, BP oil consumption figures imply almost 6 percent of GDP for Malaysia and 4 ½ percent of GDP for Russia.
- Components of equilibrium non-oil current account (Table 5; components in percent of 2012 GDP; columns preserved as [1] Annual Return on oil wealth, [2] PDV of non-oil cash flow 1/, [3] Consumption tilting 1/, [4] Domestic oil consumption, [1]+[2]+[3]+[4] total):
  - Venezuela: [1] -15.9; [2] 15.0; [3] 0.0; [4] -8.2; [1]+[2]+[3]+[4] 0.0? (source presents -10.6 in final column—preserve table row as in source)
  - Kuwait: [1] -19.5; [2] 7.0; [3] 0.0; [4] 15.1; final -14.9 (preserve as in source)
  - Malaysia: [1] -2.5; [2] -26.3*; [3] -26.3; [4] 36.5*; final 13.4 (note asterisk indicates country-specific constants significant)
  - Russia: [1] -9.3; [2] -33.3*; [3] -33.3; [4] 29.9*; final -8.0
  - Saudi Arabia: [1] -16.4; [2] 13.2; [3] 0.0; [4] -12.3; final -12.4
  - United Arab Emirates: [1] -11.5; [2] 0.7; [3] 0.0; [4] -21.1; final -11.5
  - Note: Table 5 footnote: country-specific constants significant denoted by an asterisk and included in calculation; insignificant terms set to zero.
- Aggregate result: all countries except Malaysia should be running large non-oil current account deficits, ranging from about 8 percent of GDP for Russia to 17 percent of GDP for Kuwait (as summarized in the text).

### V. SENSITIVITY TESTS OF THE ANNUAL RETURN ON OIL WEALTH
- Sources of uncertainty in oil reserve estimates:
  - Cross-agency differences can be material (example: Russia estimates range from ~69 to 120 billion barrels; BPI latest estimate about 80 billion barrels).
  - Substituting highest Russia reserve estimate raises oil return by about 4 ½ percentage points to 14 percent of GDP (text statement).
- Historical revisions in reserve estimates (Table 6: percent differences comparing BPI and Oil and Gas Journal for 1996 and 2001 benchmarks):
  - Venezuela 12.66; Kuwait 2.66; Malaysia 14.2; Russia 32.8; Saudi Arabia 1.06; United Arab Emirates -0.31; Median 1.86 (1996) and 2.16 (2001) reported in notes—preserve table values as presented.
  - Median cross-country disparity between most recent BPI estimate (June 2007) and Oil and Gas Journal for 1996 is 1.9 percent; for 2001 is 2.2 percent.
- Sensitivity to discount rate and oil price:
  - Lowering discount rate from 4 to 3 percent reduces estimated annual return on oil wealth; largest effect for Kuwait: near 20 percent of GDP at 4 percent discount falls below 9 percent at 3 percent.
  - Valuing oil wealth using average real oil price over 1985-2000 (about US$25 per barrel in current prices) yields much lower returns than baseline.
  - Valuing oil wealth using WEO medium-term forecast (US$124 per barrel) yields much higher returns.
- Sensitivity table (Table 7: Annual return on oil wealth, percent of 2012 GDP, under scenarios):
  - Baseline (Oil price at US$67; discount rate 4%): Venezuela 15.9; Kuwait 19.5; Malaysia 2.5; Russia 9.3; Saudi Arabia 16.4; United Arab Emirates 11.5
  - Oil price at US$67; discount rate at 3%: Venezuela 12.4; Kuwait 8.6; Malaysia 1.6; Russia 7.5; Saudi Arabia 9.6; United Arab Emirates 6.7
  - Oil price at US$25; discount rate at 4%: Venezuela 6.0; Kuwait 7.4; Malaysia 0.9; Russia 3.4; Saudi Arabia 6.2; United Arab Emirates 4.4
  - Oil price at US$124; discount rate at 4%: Venezuela 29.6; Kuwait 36.8; Malaysia 4.6; Russia 17.0; Saudi Arabia 30.8; United Arab Emirates 21.6

### VI. EQUILIBRIUM NON-OIL CURRENT ACCOUNT ASSESSMENT
- Historical fit:
  - Model replicates historical non-oil current account behavior well for Republica Bolivariana de Venezuela, Saudi Arabia, United Arab Emirates, and Malaysia since the Asian crisis; does not replicate Kuwait and Russia.
- Medium-term comparison (IMF staff projections, 2007-2012):
  - Projected deterioration in non-oil current accounts across all countries compared to recent past, with sizeable declines in Kuwait, Saudi Arabia, and Russia.
  - Projected non-oil current account deficits in 2012 (percent of GDP, IMF staff projection text):
    - Kuwait ~15 percent of GDP
    - Saudi Arabia ~22 percent of GDP
    - Russia ~8 percent of GDP
    - United Arab Emirates and Republica Bolivariana de Venezuela ~14-16 percent of GDP (fairly stable)
    - Malaysia surplus projected to fall to ~11 percent of GDP in 2012
- Sensitivity of equilibrium non-oil current account to oil prices and discount rates (Table 8: equilibrium concepts under assumptions; values in percent of 2012 GDP):
  - Forecast using oil prices at 1985-2000 historical average; discount rate 4%:
    - Venezuela -10.6
    - Kuwait -14.9
    - Malaysia 13.4
    - Russia -8.0
    - Saudi Arabia -12.4
    - United Arab Emirates -11.5
  - Forecast using oil prices at summer 2007 WEO levels; discount rate 3%:
    - Venezuela -7.1
    - Kuwait -3.9
    - Malaysia 14.3
    - Russia -6.2
    - Saudi Arabia -5.5
    - United Arab Emirates -6.7
  - Forecast using oil prices at summer 2008 WEO levels; discount rate 4%:
    - Venezuela -24.3
    - Kuwait -32.2
    - Malaysia 11.3
    - Russia -15.7
    - Saudi Arabia -26.8
    - United Arab Emirates -21.6
  - Additional scenario: oil prices at summer 2007 WEO levels; discount rate 4% (primary baseline in text): matches first column of Table 8 (preserve text values).
- Key sensitivity conclusions:
  - At US$67 per barrel, Saudi Arabia and United Arab Emirates show sizeable gaps (≥4 percentage points of GDP) between consumption-smoothing equilibrium and medium-term projection (non-oil current account below equilibrium).
  - At US$67 per barrel and discount rate 3 percent, gaps grow and Kuwait and Venezuela become notably below equilibrium.
  - Valuing oil at historical low average (1985-2000, US$25) makes equilibrium non-oil current accounts stronger (i.e., less negative) than medium-term forecasts.
  - Valuing oil at US$124 makes equilibrium non-oil current accounts considerably weaker (more negative) than medium-term forecasts for all countries except Malaysia.
  - For Saudi Arabia, using BP data implying domestic oil consumption of 9 percent of GDP (rather than 4 percent used) would make equilibrium non-oil current account comparable to underlying non-oil current account even at current oil prices (text note).

### VII. CONCLUSIONS AND INTERPRETATION
- Methodology deliverable: an alternative intertemporal consumption-smoothing framework to estimate equilibrium non-oil current accounts for oil exporters; suited especially to countries with large oil wealth stocks.
- Empirical fit: captures past non-oil current account behavior for Republica Bolivariana de Venezuela, Saudi Arabia, United Arab Emirates, and Malaysia (since Asian crisis); fails for Kuwait and Russia.
- Sensitivity and caveats:
  - Estimates are highly sensitive to parameter choices: discount rates, population growth, oil price profile, extraction rate, and oil reserve estimates.
  - The stock-based valuation of oil wealth implies high sensitivity to permanent price shocks; this approach is more sensitive to permanent shocks than flow approaches.
  - The methodology abstracts from precautionary saving induced by oil-price volatility; thus the estimated equilibrium current account likely understates the optimal current account balance, especially for major oil producers.
  - Recommendation: use this stock-based consumption-smoothing methodology in tandem with the IMF macroeconomic balance approach.
- Overall empirical summary (text synthesis):
  - Using oil prices prevailing in summer 2007 (US$67 per barrel), consumption-smoothing and predicted non-oil current accounts comparable for Republica Bolivariana de Venezuela, Kuwait, Malaysia and Russia; for Saudi Arabia and United Arab Emirates equilibrium non-oil current account deficit significantly less than projected outcome.
  - Valuing oil at WEO medium-term forecast (US$124) yields equilibrium non-oil current accounts for all countries (except Malaysia) considerably weaker than medium-term forecasts.
  - Valuing oil at the 1985-2000 average (US$25) yields equilibrium non-oil current accounts for all countries below the medium-term forecasts.

*Italic source attribution: IMF Working Paper _wp08198 - References (content extracted from embedded PDF chapters and tables in the provided source).*

### REFERENCES

### _wp08198 - REFERENCES

### References

- Akram F., 2004, “Oil Wealth and Real Exchange Rates: The FEER for Norway,” Norges 
  Bank Working Paper 2004/16.

- Bems Rudolfs and de Carvalho Filho, 2008, “Savings and Precautionary Motive for 
  Exporters of Exhaustible Resources,” mimeo.

- British Petroleum Statistical Review of World Energy, 2007 June.

- Ghosh, Atish, 1995, “International Capital Mobility Amongst the Major Industrialized 
  Countries: Too Little or Too Much?” 
  The Economic Journal, Vol. 105, January.

- Ghosh, Atish and Jonathan Ostry, 1997, “Macroeconomic Uncertainty, precautionary saving, 
  and the current account,” 
  Journal of Monetary Economics, Vol. 40, pp. 121-139.

- Grace, J., 2005, 
  Russian Oil Supply – Performance and Prospects, Oxford, Oxford 
  University Press

- IMF, 2006, “Methodology for CGER Exchange Rate Assessments,” SM/06/183

- Jenkins, G., 1997, “World Oil Reserves Reporting 1948-96: Political, Economic and 
  Subjective Influences,” 
  OPEC Review, June.

- Radler, M., 2000, “World Crude and Natural Gas Reserves Rebound in 2000,” 
  The Oil and 
  Gas Journal, Vol. 98, No. 51, December.

- Segura, A., 2006, “Management of Oil Wealth under the Permanent Income Hypothesis: The 
  Case of Sao Tome and Principe,” IMF working paper 06/183.

- United States Department of the Interior, 
  United States Geological Survey, 2000.

*Source: _wp08198 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08198.pdf_