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Extracting Common Oil: Cooperation or Competition?

This paper considers how likely it is that a given number of agents who share a homogeneous oil reservoir will exploit the reservoir for their common benefit. A game-theoretical model is used, examining whether one agent would profit from deviating from the cooperative strategy, given that the remaining agents would follow a subgame-perfect retaliation strategy. The paper also, examines the sensitivity of the cooperative solution to the number of agents, the, time it takes to discover a deviation, the value of production relative to, investment, and the discount rate. It isf ound that the cooperative solution is very sensitive to the number of agents; with more than three agents the cooperative solution becomes very unlikely.

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Energy Specializations: Petroleum – Exploration and Production; Petroleum – Policy and Regulation; Natural Gas – Policy and Regulation

JEL Codes:
D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Oil property rights, oil industry, oil fields, sales agreements, oil production

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No2-5

Published in Volume21, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.