The selection of welfare-enhancing projects necessitates the determination of the present value of cash flows from a public policy perspective. For an oil-exporting economy, the domestic energy transition often implies displacing oil from domestic consumption. Economic dependence on oil affects the public discount rate for oil-related cash flows in two opposite ways. On the one hand, it renders the economy more volatile, lowering the risk-free discount rate; on the other hand, it increases the correlation between consumption and the oil price, resulting in a higher risk premium. To study these opposite effects, we first derive the public discount rate for an oil-related investment project. Our framework considers economic uncertainty and an oil price-related risk premium, and it makes it possible to value oil at its opportunity cost. We illustrate our methodology using data from a panel of 26 oil-exporting countries. The results indicate that a risk-free discount rate of 3.1% is appropriate for our panel. However, to discount oil-related cash flows, a risk premium of 1.4% needs to be added to the risk-free rate, yielding a risk-adjusted real discount rate of 4.5%. We find significant disparities between country-specific public discount rates. Additionally, for each country, we assess the present value of reducing domestic oil consumption by a barrel per day from 2023 to 2040, decomposing the different effects. Oil-exporting countries can use our estimates to make investment or policy decisions.
Principal Fellow- Energy Macro & Microeconomics
Fatih is an economist who is interested in energy and environment. Before joining KAPSARC in December 2017, he was an…
Fatih is an economist who is interested in energy and environment. Before joining KAPSARC in December 2017, he was an Associate Professor of Economics at the University of Paris Nanterre and was a Fellow at EconomiX-CNRS in France. During this period, he conducted research, taught courses in energy economics, environmental economics, and econometrics, and contributed to projects funded by organizations such as the European Renewable Energy Council, the French Energy Council, and Région Île-de-France. Fatih’s work at KAPSARC mainly focuses on developing economic frameworks to provide insights into energy and economic policymaking in oil-producing countries, particularly Saudi Arabia. His research appears in leading journals in energy economics as well as general-interest economics journals. He received his Ph.D. in Economics from the University of Paris 1 Panthéon-Sorbonne in 2008. Prior to that, he completed an M.A. in Economic Analysis and Modeling jointly offered by the University of Paris 1 Panthéon-Sorbonne and École Centrale Paris. Fatih also holds an HDR degree, which is a French accreditation to supervise doctoral research.
Expertise
- Energy Economics
- Environmental Economics
- Applied Economics
Publications See all Fatih Karanfil’s publications
Energy Transition in Oil-Dependent Economies: Public Discount Rates for Investment Project Evaluation
The selection of welfare-enhancing projects necessitates the determination of the present value of cash flows…
5th June 2024Fiscal Policy in Oil and Gas-exporting Economies: Good Times, Bad Times and Ugly Times
The selection of welfare-enhancing projects necessitates the determination of the present value of cash flows…
12th September 2023