Gas Riches in Israel
A very extensive article from the Jerusalem Post provides interesting reading for both followers of natural gas and of economics in general.
In Natural Gas Bonanza, Blessing or Bane, writer Ziv Helleman comments that Israel may learn, as other countries have, that the sudden discovery of natural resources often has negative as well as positive effects
In February 2009, an consortium drilling in the Mediterranean Sea 90 kilometers (56 miles) off the coast of Haifa, announced that early signs indicated that the Tamar 1 gas field, contained 3.1 trillion cubic feet (TCF) of gas. Subsequently, estimates of the Tamar reserves were bumped up to 5 TCF.
The Tamar gas field was declared to be the largest gas find ever discovered in the eastern Mediterranean Sea, and the largest find in the world in 2009.
Then in June of this year, the consortium – which includes the Houston-based oil operator Noble Energy Inc., admitted its initial estimates had been wrong. The field, it reported, contained reserves of not 5 TCF of gas, but an immense 8.7 TCF.
Analysts estimated a gas field that size would suffice to provide Israel’s energy needs for over 35 years. The discovery by all indications will make the Israel an international energy exporter for the first time in its history.
Then the consortium announced this June that seismic tests a site named Leviathan located 130 kilometers (81 miles) from the Haifa coast, indicated gas reserves of a staggering 16 TCF, making the aptly named Leviathan field twice as large as Tamar.
Excluding Russia, Israel is currently ranked fourth in Europe in proven natural gas reserves, after Norway, the Netherlands and the United Kingdom,” says Amit Mor, CEO of Eco Energy Ltd., an energy and environmental financial consultancy and investment firm. “If Leviathan does contain the amount of natural gas that is indicated by the early tests, it will move ahead of the UK and the Netherlands.
Undoubtedly Tamar and perhaps Leviathan (if proven up) will provide significant geopolitical benefits to Israel as a long-term reliable source of energy. Israeli energy production to date has depended on oil and coal imports from as far away as Mexico and Norway.
Since energy imports are the single largest factor influencing Israel’s balance of trade and, by extension, its balance of payments, moving from energy importer to exporter can have significant macroeconomic consequences. For example, in late 2008, when world oil prices collapsed, the country’s trade deficit evaporated and for several months Israel ran a trade surplus.
The potential windfall for those involved, for those directly involved in the industry, their suppliers, to the state by way of royalties, are very large. While large resource discoveries may appear to be an unmitigated gift for a country, historical record often indicates otherwise. But it is precisely for that reason that some in Israel have voiced cautious warnings.
An over-emphasis on resource exports can crowd out other exports and distort exchange rates, and over-reliance on selling commodities abroad means being at the mercy of commodity price swings. Windfalls from the export of resources have in many countries alos been a catalyst of income inequalities and an incentive for corruption.
The article discusses “the Dutch disease”, a term in economic theory that has developed to explain a possible relationship between the increase in natural resources development and declines in manufacturing sectors. The name comes from the experience of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.
Initially hailed as a lucky find for the Netherlands, it led the Dutch currency to soar in value, making Dutch labor and products become less competitive, a very negative consequence for a small economy dependent on international trade. Similar effects were noted in the United Kingdom when North Sea oil began to flow and the pound sterling temporarily became a “petro currency.”
Under the Dutch model, a booming sector based on the extraction of oil or natural gas crowds out “lagging sectors” in manufacturing or agriculture. The resource boom shifts labor away from lagging sectors. At the same time, the extra revenue brought in from the booming sector leads to changes in wages, prices and exchange rates – with the latter harming the competitiveness of manufactured exports.
Omer Moav, professor of economics at the Hebrew University, says that there are indeed reasons for concern about the large-scale export of natural gas. “Exporting energy will have a negative effect on other Israeli exports,” says Moav.
The article continues on to discuss territorial and environmental controversies, royalty issues that are now emerging as result of the Tamar discovery and Norway and its successful management of riches from its natural resources.
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