Oil Price Shocks and Conflict Escalation: Onshore versus Offshore

• Author: Andrea Tesei,Jørgen Juel Andersen,Frode Martin Nordvik
• Published date: 01 February 2022
• DOI: 10.1177/00220027211042664
• Date: 01 February 2022
• Subject Matter: Articles

2022, Vol. 66(2) 327 –356

Oil Price Shocks and Conflict

Escalation: Onshore versus

Offshore

Jørgen Juel Andersen

1

, Frode Martin Nordvik

2

,

and Andrea Tesei

3

Abstract

We reconsider the relationship between oil and conflict, focusing on the location of

oil resources. In a panel of 132 countries over the period 1962-2009, we show that

oil windfalls escalate conflict in onshore-rich countries, while they de-escalate

conflict in offshore-rich countries. We use a model to illustrate how these oppo-

site effects can be explained by a fighting capacity mechanism, whereby the

government can use offshore oil income to increase its fighting capacity, while

onshore oil may be looted by oppositional groups to finance a rebellion. We provide

empirical evidence supporting this interpretation: we find that oil price windfalls

increase both the number and strength of active rebel groups in onshore-rich

countries, while they strengthen the government in offshore-rich ones.

Keywords

natural resources, conflict

Oil is often considered responsible for fueling civil conflicts and wars - both as a

source of funding for the contenders and as a prize for the fighting. Anecdotal

evidence consistent with this argument abounds: examples of recent oil-related

episodes of conflict include ISIL’s strategic control of resources in Syria and Iraq,

1

BI Norwegian Business School, Oslo, Norway

2

Kristiania University College, Kristiania, Norway

3

Queen Mary University of London, CEP (LSE), CEPR & CESifo, London, United Kingdom

Corresponding Author:

Andrea Tesei, Queen Mary University of London, CEP (LSE), CEPR & CESifo, 327 Mile End Road, London,

E1 4NS, United Kingdom.

Email: a.tesei@qmul.ac.uk

Journal of Conflict Resolution

ªThe Author(s) 2021

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DOI: 10.1177/00220027211042664

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Article

328 Journal of Conflict Resolution 66(2)

oil theft by MEND rebels in Nigeria, and attacks to extraction facilities by Darfur

insurgents in South Sudan.

1

Despite the popularity of the argument, establishing a systematic nexus between oil

wealth and conflict has proved complex, since oil-rich countries display large varia-

tions in measures of internal stability. While countries like Iraq and Nigeria are often

cited as examples of the nefarious consequences of oil abundance on conflict, other

countries, as diverse as Qatar, Norway and Gabon, have never experienced a civil

conflict over the past 40 years in spite of their vast oil wealth. Yet other countries, like

Angola and Azerbaijan, have even put an end to their conflicts in correspondence to

large increases in oil wealth. Indeed, while early cross-sectional studies generally

found a positive association between oil wealth and the onset and duration of conflicts

and wars (Collier and Hoeffler 2004; Fearon and Laitin 2003; Le Billon 2003), more

recent studies focusing on within-country variation find mixed evidence on the rela-

tionship (e.g. Bazzi and Blattman 2014; Lei and Michaels 2014).

In this paper, we take a fresh look at the oil-conflict nexus by analyzing how

conflict and war escalations depend on the location of oil, using new

industry-licensed data allowing us to distinguish between onshore and offshore

production. In a large panel of countries, we first confirm the insignificant average

effect of oil wealth on the probability of conflict, consistent with the existing incon-

clusive evidence (Bru

¨ckner and Ciccone 2010; Cotet and Tsui 2013; Bazzi a nd

Blattman 2014; Ciccone 2018). We then show how this zero-result may be attributed

to opposite-sign effects of onshore and offshore oil. While greater onshore oil wealth

makes conflict and civil war outbreaks and escalations more likely, greater offshore

oil wealth tends to de-escalate conflicts.

To reach these conclusions we use exogenous fluctuations in international oil

prices, weighted by each country’s average shares of onshore and offshore produc-

tion in GDP. The effects we document are both statistically and economically

significant. For a large onshore producer like Iraq, our estimates suggest that a one

standard deviation increase in the price of oil raises the probability of conflict

escalation by 3 percentage points, or 28%compared to its average probability. For

a large offshore producer like Azerbaijan, instead, a similar oil price windfall

reduces the probability of conflict escalation by 1.6 percentage points, or 39%of

its mean. In general, we show that the overall impact of oil price windfalls shifts

from reducing to increasing the probability of conflict escalation when the share of

onshore oil exceeds about 38%of total production.

We attribute the opposite effect of oil price windfallsin onshore- and offshore-rich

countries to their differential impact on the fighting capacities of the contenders. We

argue that a crucialdifference between offshore andonshore facilities is that the latter

can more easilybe attacked, looted, and even seizedby rebel groups, which in turn can

use the proceeds from the looting to maintain and equip their troops. Thus, oil price

windfalls increase relatively more the fighting capacity of rebels compared to the

government, the larger is the share of onshore oil production for any given share of

offshore(or total) oil productionin GDP. Conversely,oil price windfalls tiltthe balance

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