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Dynamic Behavior of Oil Importers and Exporters Under Uncertainty

In: Dynamic Optimization in Environmental Economics

Author

Listed:
  • Lucas Bretschger

    (CER-ETH)

  • Alexandra Vinogradova

    (CER-ETH)

Abstract

We consider long-run incentives for oil-importing and -exporting countries when the arrival of a backstop technology is uncertain. Oil importers invest in research and development to avoid their dependence on foreign oil; the arrival of the oil substitute is modeled with a Poisson process. The optimum resource extraction path is determined by the optimization of oil exporters, which take the Poisson rate as exogenously given. We provide clear-cut solutions of the optimization plans for both types of countries. We find that the optimal consumption rate of oil importers may be either constant or falling during substitute development; it is a decreasing function of the oil price. When the substitute arrives, the rate of resource depletion jumps down and the depletion pace during the post R&D phase is slower than during the R&D phase, provided that the Poisson arrival rate is sufficiently large. We also show under which conditions there is never strategic behavior and when strategic behavior may take place.

Suggested Citation

  • Lucas Bretschger & Alexandra Vinogradova, 2014. "Dynamic Behavior of Oil Importers and Exporters Under Uncertainty," Dynamic Modeling and Econometrics in Economics and Finance, in: Elke Moser & Willi Semmler & Gernot Tragler & Vladimir M. Veliov (ed.), Dynamic Optimization in Environmental Economics, edition 127, pages 195-213, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-54086-8_9
    DOI: 10.1007/978-3-642-54086-8_9
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