Will Continued Development of Israel’s Natural Gas Resources Led to the “Dutch Disease”?

Continued development of the Tamar & Leviathan gas fields at the current rate, and in particular the country’s transition to being a significant gas exporter might incur the “Dutch disease” over Israel’s economy – with the economy being over-proportionately based on the export of natural gas, while significantly impairing the competitiveness of other business sectors.

These conclusions are based on preliminary results of a new study conducted at the Natural Resources and Environmental Research Center (NRERC) at the University of Haifa, the findings of which were presented in detail at a conference on “Natural Gas and the Israeli Society,” held on June 21st, 2015, at the University of Haifa.

 
“The findings of the study, which is based on an economic model that evaluates the impact of gas production across all sectors of the Israeli economy, are indicating an overall GDP increase, but the output of sectors not related to the production of gas declines,” the researchers say.
The study, conducted by Dr. Ruslana Rachel Palatnik, Idan Liebes, Zvi Baum, Ayeleth Davidovich, and Prof. Ofira Ayalon, is the first academic study to examine the effects of gas production over the entire Israeli economy, and is based on the current rate of development of the Tamar gas field and the allocation of gas produced between export and the domestic economy under the currently existing agreements – when, in fact, the export of gas has still not begun.

 

According to the researchers, any increase in either the rate of production or the quantity of gas destined for export, as well as the entry of the Leviathan gas field into the picture, will exacerbate the effects found by the model. The production and outputs of the entire Israeli economy are based on the statistics from the Central Bureau of Statistics Input-Output data for 2006 which were adapted to their actual values for 2015.

 
As mentioned above, the main finding of the research is that continued development of the Israel’s gas sector at its present rate might lead the country’s economy to the “Dutch disease”: an economy based on a primary natural resource generates an increased inflow of foreign currency, causing the local currency to appreciate, but at the expense of the competitiveness of other economic sectors unrelated to this natural resource. Thus, among other things, the model finds that while the Gross Domestic Product (GDP) should rise by 1%, consistent with the evaluations of the Bank of Israel the output of the entire business sector of Israel is liable to decrease by as much as 20%.

 

The model also finds that the shekel will appreciate against the dollar by 3.5%, something which will harm the industrial sector, particularly exporters. “The harm to productivity as well as the ability to compete in the global market will be in all sectors – from hi-tech to more traditional industries,” the researchers note.
The researchers are now involved in searching for ways to mitigate the negative effects of development of the gas sector which emerge from their model, mainly by examining the various impacts which are likely to result from the adoption of elements of the “Norwegian Model” as well as investment in the “Future Generation Fund, and its most effective use”

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