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Putting OPEC out of business

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  • Niko Jaakkola

Abstract

I develop a differential game between an oil cartel, and an importer investing in R&D to reduce the cost of a substitute to oil. The equilibrium dynamics mirror the recent oil price collapse: prices first increase, but eventually fall as the cartel is forced to deter unconventional (shale) oil. Interpreting the substitute as clean energy, I assess future climate policy. Credible carbon taxes are below the Pigovian level, implying the importer certainly cannot capture resource rents. Without a tax instrument, the importer curtails long-run pollution using a costly R&D programme. Normatively, carbon taxes are necessary to tackle climate change efficiently.

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  • Niko Jaakkola, 2012. "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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    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. Naef, Alain, 2024. "The impossible love of fossil fuel companies for carbon taxes," Ecological Economics, Elsevier, vol. 217(C).
    3. 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.
    4. 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.
    5. Jaakkola, Niko, 2019. "Carbon taxation, OPEC and the end of oil," Journal of Environmental Economics and Management, Elsevier, vol. 94(C), pages 101-117.
    6. Jaakkola, Niko & van der Ploeg, Frederick, 2019. "Non-cooperative and cooperative climate policies with anticipated breakthrough technology," Journal of Environmental Economics and Management, Elsevier, vol. 97(C), pages 42-66.
    7. 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.
    8. 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).
    9. Malik Curuk & Suphi Sen, 2023. "Climate Policy and Resource Extraction with Variable Markups and Imperfect Substitutes," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(4), pages 1091-1120.
    10. van der Meijden, Gerard & Withagen, Cees, 2019. "Limit pricing, climate policies, and imperfect substitution," Resource and Energy Economics, Elsevier, vol. 58(C).
    11. 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.
    12. Malik Curuk & Suphi Sen, 2023. "Climate Policy and Resource Extraction with Variable Markups and Imperfect Substitutes," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(4), pages 1091-1120.
    13. Michielsen, Thomas O., 2014. "Strategic resource extraction and substitute development," Resource and Energy Economics, Elsevier, vol. 36(2), pages 455-468.
    14. van der Meijden, Gerard & Withagen, Cees, 2020. "Monopoly, unilateral climate policies and limit pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    15. Thomas St�rdal Gundersen & Even Soltvedt Hvinden, 2021. "OPEC's crude game: Strategic Competition and Regime-switching in Global Oil Markets," Working Papers No 01/2021, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    16. Hart, Rob & Gars, Johan, 2022. "The black paradox," European Economic Review, Elsevier, vol. 148(C).
    17. Sun, Qingqing & Chen, Hong & Long, Ruyin & Yang, Jiahui, 2023. "Who will pay for the “bicycle cemetery”? Evolutionary game analysis of recycling abandoned shared bicycles under dynamic reward and punishment," European Journal of Operational Research, Elsevier, vol. 305(2), pages 917-929.

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    More about this item

    Keywords

    exhaustible resources; OPEC; oil prices; alternative fuels; limit;
    All these keywords.

    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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