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

Hassan Benchekroun (), Gerard van der Meijden () and Cees Withagen

No 6746, CESifo Working Paper Series from CESifo Group Munich

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 (search for similar items in EconPapers)
JEL-codes: Q31 Q42 Q54 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2017
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