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OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction

Author

Listed:
  • Hassan Benchekroun
  • Gerard C. van der Meijden
  • Cees A. Withagen

Abstract

We show that OPEC’s market power contributes to global warming by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We fully characterize the equilibrium of a cartel-fringe model and use a calibration to examine the importance of this extraction sequence effect. While welfare under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost all of this welfare loss is due to the sequence effect. Moreover, the recent boom in shale oil reserves may reduce social welfare and renewables subsidies can increase the carbon content of current extraction.

Suggested Citation

  • Hassan Benchekroun & Gerard C. van der Meijden & Cees A. Withagen, 2017. "OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction," CESifo Working Paper Series 6746, CESifo.
    • Handle: RePEc:ces:ceswps:_6746
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    Cited by:

    1. van der Ploeg, Frederick, 2020. "Race to burn the last ton of carbon and the risk of stranded assets," European Journal of Political Economy, Elsevier, vol. 64(C).
    2. van der Meijden, Gerard & Ryszka, Karolina & Withagen, Cees, 2018. "Double limit pricing," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 153-167.
    3. Roberts, Gavin & Barbier, Edward & van 't Veld, Klaas, 2019. "Global emissions from crude oil: The effect of oil-deposit heterogeneity," Energy Policy, Elsevier, vol. 132(C), pages 654-664.
    4. Benchekroun, Hassan & van der Meijden, Gerard & Withagen, Cees, 2019. "An oligopoly-fringe non-renewable resource game in the presence of a renewable substitute," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 1-20.

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    More about this item

    Keywords

    cartel-fringe; climate policy; non-renewable resource; Herfindahl rule; limit pricing;
    All these keywords.

    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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