Do oil producers act as 'Oil'igopolists?

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Abstract

In this paper, I analyze an oligopoly model of exhaustible resource extraction and develop predictions about relative extraction patterns of different producers. Using the 'oi''igopoly model of Loury (Internat. Econom. Rev. 27, 285-301 (1986)), one can show that producers with large stocks produce a larger amount, but a smaller percentage, of their stocks than producers with small stocks. I extend Loury's model to cases where extraction costs differ among producers and where costs are a function of cumulative extraction. An increase in extraction costs for a producer causes it to produce less relative to its rivals. When extraction costs rise with cumulative extraction, producers with large reserves tend to have lower extraction costs and a smaller ratio of cumulative production to initial reserves than producers with small reserves. I test the predictions of the model using oil industry data and find that the empirical results are consistent with the predictions of 'oil'igopoly theory. Producers with larger reserves extract a smaller share of their reserves and have lower production costs than producers with smaller reserves. This pattern holds for 73 countries with oil reserves during the time period 1970-1989, and for approximately 400 U.S. oil companies in 1983 and 1984. The observed pattern of production for both OPEC and non-OPEC producers is consistent with 'oil'igopoly theory. OPEC producers do not appear to restrain production given their level of reserves relative to non-OPEC producers. Thus, viewing the oil market as containing one dominant firm (OPEC) with a competitive fringe may be misleading. Further, the pattern of extraction observed in oil markets is inconsistent with the pattern predicted by competitive theory.

Original languageEnglish (US)
Pages (from-to)216-247
Number of pages32
JournalJournal of Environmental Economics and Management
Volume23
Issue number3
DOIs
StatePublished - Nov 1992

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