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How Does the Cost of Capital Affect Oil Production?

Author

Listed:
  • Helena Cordt
  • Julien Daubanes
  • Yiding Ma
  • Julien Xavier Daubanes

Abstract

In the spirit of green finance taxonomies, restricting fossil-fuel producers' access to funds is hoped to help address the climate problem. We develop a project-level model of oil production, calibrate it to the universe of U.S. and Canadian oil projects producible over 2000-2024, and simulate the effects of the cost of capital. Modest increases in this cost are counterproductive, increasing oil production through industry short-termism while reducing project value. Effective costs of capital are unrealistically large, at odds with projects' internal rates of return. At the industry level, a higher cost of capital generates equilibrium adjustments that boost oil profitability.

Suggested Citation

  • Helena Cordt & Julien Daubanes & Yiding Ma & Julien Xavier Daubanes, 2026. "How Does the Cost of Capital Affect Oil Production?," CESifo Working Paper Series 12865, CESifo.
    • Handle: RePEc:ces:ceswps:_12865
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12865.pdf
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    Keywords

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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