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Putting OPEC Out of Business

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  • Niko Jaakkola

Abstract

I explain the recent peak and subsequent collapse in oil prices by strategic interaction between a limit-pricing oil cartel and an importer producing substitutes to oil, with productin costs falling with R&D investment. The model is consistent with reported narratives of the oil price collapse. Applied to climate policy and the development of clean substitutes, the model predicts equilibrium carbon taxes are below the Pigovian level, but put the monopolist out of business once oil loses its social value. Without taxes, the importer uses an expensive crash R&D programme instead. 'Green' R&D and carbon pricing are thus complements, not substitutes.

Suggested Citation

  • Niko Jaakkola, 2013. "Putting OPEC Out of Business," OxCarre Working Papers 099, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:099
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    File URL: http://www.oxcarre.ox.ac.uk/files/OxCarreRP201299.pdf
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    References listed on IDEAS

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    Cited by:

    1. Andrade de Sá, Saraly & Daubanes, Julien, 2016. "Limit pricing and the (in)effectiveness of the carbon tax," Journal of Public Economics, Elsevier, vol. 139(C), pages 28-39.
    2. Frederick Ploeg & Aart Zeeuw, 2016. "Non-cooperative and Cooperative Responses to Climate Catastrophes in the Global Economy: A North–South Perspective," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(3), pages 519-540, November.
    3. van der Ploeg, Frederick, 2016. "Second-best carbon taxation in the global economy: The Green Paradox and carbon leakage revisited," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 85-105.
    4. Niko Jaakkola & Frederick van der Ploeg, 2017. "Non-Cooperative and Cooperative Climate Policies with Anticipated Breakthrough Technology," OxCarre Working Papers 190, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    5. Saraly Andrade de Sa & Julien Daubanes, 2014. "Limit-Pricing and the (Un)Effectiveness of the Carbon Tax," Working Papers 2014.07, FAERE - French Association of Environmental and Resource Economists.
    6. Gerard van der Meijden & Cees Withagen, 2016. "Limit Pricing, Climate Policies, and Imperfect Substitution," Tinbergen Institute Discussion Papers 16-089/VIII, Tinbergen Institute.
    7. Gerard C. van der Meijden & Cees A. Withagen, 2016. "Limit Pricing, Climate Policies, and Imperfect Substitution," CESifo Working Paper Series 6163, CESifo Group Munich.
    8. Frederick van der Ploeg & Cees Withagen, 2015. "Global Warming and the Green Paradox: A Review of Adverse Effects of Climate Policies," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 9(2), pages 285-303.
    9. Rick van der Ploeg, 2017. "Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets," CESifo Working Paper Series 6793, CESifo Group Munich.
    10. Michielsen, Thomas O., 2014. "Strategic resource extraction and substitute development," Resource and Energy Economics, Elsevier, vol. 36(2), pages 455-468.

    More about this item

    Keywords

    exhaustible resources; OPEC; oil prices; alternative fuels; limit pricing; climate change;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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