Political risk analysis, or country risk analysis is one of the more contentious topics in the petroleum economics universe. Overseas investors have several choices with regard to country risk analysis.

  1. Ignore it

  2. Delegate analysis to outside experts

  3. Calculate it themselves

In the real world, investors would probably choose to avail themselves of outside counsel AND calculate risk factors themselves, provided a suitable method to do so exists. Ideally, the process of consulting experts and performing internal assessment of potential risks facing an investment proposal would produce chance factors for various scenarios which could be utilized in expected-net-present-value calculations.

Economic investments always occur in a political environment Economically sensible projects should encounter political acceptance. Foreign investment projects ultimately must make economic sense to host nation governments and their populations, as well as to investors. Political risks tend to materialize whenever large, organized groups within a host nation perceive foreign investment as something which ceases to make economic sense to them. More specifically, whenever people perceive foreign investment as being detrimental or neutral toward their economic interests, the potential for political risk events increases.

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