Abstract
For an oil-exporting economy, valuing oil-related cash flows from a public perspective requires using a discount rate equal to the risk-free public rate plus a risk premium. Economic dependence on oil affects the public discount rate for oil-related cash flows in two opposite ways: on one hand, it renders the economy more volatile, which lowers the risk-free discount rate, on the other hand, it increases the correlation between consumption and the oil price, which results in a higher risk premium. To study these two opposite forces and the resulting impact on the valuation of oil-related cash flows, we first provide an overview of the derivation of a public discount rate for an oil-related investment project. Our framework considers economic uncertainty, an oil-price-related risk premium, and allows for valuing the barrel of oil at its opportunity cost. We illustrate our methodology using data from a panel of 26 oil-exporting countries covering the period from 1999 to 2020. Results indicate that a risk-free discount rate of 3.1% is appropriate for our panel of countries. However, to discount oil-related cash flows, a risk premium of 1.4% needs to be added to the risk-free rate, which yields a risk-adjusted real discount rate of 4.5%. We find significant disparities between country-specific public discount rates. Less export diversification tends to be associated with lower discount rates. Additionally, for each country in our panel, we assess the present value of exporting a barrel of oil per day from 2023 to 2040, breaking down the different effects.
