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Optimal Oil Exploration under Climate Treaties

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  • Elin Berg
  • Snorre Kverndokk
  • Knut Einar Rosendahl

    ()
    (Statistics Norway)

Abstract

In this paper we focus on how an international climate treaty will influence the exploration of oil in Non-OPEC countries. We present a numerical intertemporal global equilibrium model for the fossil fuel markets. The international oil market is modelled with a cartel (OPEC) and a competitive fringe on the supply side, following a Nash-Cournot approach. An initial resource base for oil is given in the Non-OPEC region. However, the resource base changes over time due to depletion, exploration and discovery. When studying the effects of different climate treaties on oil exploration, two contrasting incentives apply. If an international carbon tax is introduced, the producer price of oil will drop compared to the reference case. This gives an incentive to reduce oil production and exploration. However, the oil price may increase less rapidly over time, which gives an incentive to expedite production, and exploration. In fact, in the case of a rising carbon tax we find the last incentive to be the strongest, which means that an international climate treaty may increase oil exploration in Non-OPEC countries for the coming decades.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 245.

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Date of creation: Jan 1999
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Handle: RePEc:ssb:dispap:245

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Keywords: International Climate Treaties; Exhaustible Resources; Optimal Oil Exploration;

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  1. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1995. "Effects of Liberalizing the Natural Gas Markets in Western Europe," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-112.
  2. Berg, Elin & Kverndokk, Snorre & Rosendahl, Knut Einar, 1998. "Gains from cartelisation in the oil market," Energy Policy, Elsevier, vol. 26(9), pages 725-727, August.
  3. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
  4. Elin Berg & Snorre Kverndokk & Knut Einar Rosendahl, 1996. "Market Power, International CO2 Taxation and Petroleum Wealth," Discussion Papers 170, Research Department of Statistics Norway.
  5. Snorre Kverndokk, 1994. "Depletion of Fossil Fuels and the impact of Global Warming," Discussion Papers 107, Research Department of Statistics Norway.
  6. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
  7. Devarajan, Shantayanan & Fisher, Anthony C, 1982. "Exploration and Scarcity," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1279-90, December.
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  10. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1079-93, October.
  11. Swierzbinski, Joseph E & Mendelsohn, Robert, 1989. "Exploration and Exhaustible Resources: The Microfoundations of Aggregate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 175-86, February.
  12. Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
  13. Wirl Franz, 1994. "Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic, Noncompetitive Energy Pricing," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 1-18, January.
  14. Rolf Golombek & Jan Braten, 1994. "Incomplete International Climate Agreements: Optimal Carbon Taxes, Market Failures and Welfare Effects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 141-166.
  15. Livernois, John R & Uhler, Russell S, 1987. "Extraction Costs and the Economics of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 195-203, February.
  16. Tahvonen, Olli, 1996. "Trade with Polluting Nonrenewable Resources," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 1-17, January.
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