Overreporting Oil Reserves

An increasing number of oil market experts argues that OPEC members substantially overstate their oil reserves. While the implied outlooks for the world economy are disastrous, the incentives for overreporting remain unclear. This paper shows that oil exporting countries may rationally overreport to raise expected future supply, discourage oil-substituting R&D, and hence improve their future market conditions. Yet, credible overreporting must be backed by observable actions and therefore induces costly distortions of supply. Surprisingly, these distortions can cancel with other distortions, arising as reaction to technological change regardless of information asymmetries. In this case, overreporting is rational, credible, and cheap.