Putting OPEC out of business

Working paper

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.

Authors: Jaakkola, N

• Publication status: Published
• Publisher: University of Oxford
• Series: OxCarre Papers
• Publication date: 2012-10-10
• Paper number: 99
• Keywords: alternative fuels; OPEC; oil prices; exhaustible resources; limit