OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction

50 Pages Posted: 16 Jan 2018

See all articles by Hassan Benchekroun

Hassan Benchekroun

McGill University - Department of Economics

Gerard van der Meijden

Vrije Universiteit Amsterdam, School of Business and Economics

Cees Withagen

Free University of Amsterdam; Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2017

Abstract

We show that OPEC’s market power contributes to global warming by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We fully characterize the equilibrium of a cartel-fringe model and use a calibration to examine the importance of this extraction sequence effect. While welfare under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost all of this welfare loss is due to the sequence effect. Moreover, the recent boom in shale oil reserves may reduce social welfare and renewables subsidies can increase the carbon content of current extraction.

Keywords: cartel-fringe, climate policy, non-renewable resource, Herfindahl rule, limit pricing

JEL Classification: Q310, Q420, Q540, Q580

Suggested Citation

Benchekroun, Hassan and van der Meijden, Gerard and Withagen, Cees A. M., OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction (November 28, 2017). CESifo Working Paper Series No. 6746. Available at SSRN: https://ssrn.com/abstract=3102351

Hassan Benchekroun

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Gerard Van der Meijden (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Cees A. M. Withagen

Free University of Amsterdam ( email )

Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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