Supply response, economic diversification and recovery strategy in the oil sector

Abstract We argue that country oil supply response to price is affected by structural, market and policy-induced factors and conceptualized their effects. For fifty three major oil-producing countries, we further estimate country price elasticities of oil supply through a random effects model, which allows the estimation of the output effects of factors that can be shaped by public policies. Results obtained from panel data for the 1995-2014 time-period suggest the potential to accelerate recovery from an oil price depression through deliberate policies aimed at making oil supply more price responsive. Such policies include improved business climate, reduced corruption and larger levels of government spending. Greater degrees of diversification from oil, larger oil reserves, higher GDP and a less favorable exchange rate are also found to increase the potential for economic resurgence as oil prices increase. OPEC membership is also found to boost the potential for sectorial and overall economic recovery.