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OPEC Strategies and Oil Rent in a Climate Conscious World

Abstract:
In the UNFCCC process, energy exporting countries (primarily OPEC) claim compensation for losses in expected oil rent due to CO2 mitigation measures. However, there are mechanisms that may raise rather than lower the oil rent. If a carbon price is implemented universally, the cost of using oil substitutes such as unconventional oil or synthetic diesel from coal or natural gas will increase even more than the cost of using conventional oil. Here, a dynamic model that takes into account OPEC�s dominant position in the world�s liquid fuel market is developed in order to analyze these mechanisms. In this model, OPEC is assumed to act as strategic leader while all other liquid fuel producers act as price-takers. We find that the net present value of OPEC�s conventional oil rent increases by about 5% due to the carbon prices needed to reach stringent CO2 emission targets. For less ambitious targets, the increase in oil rent could be even higher. An extensive sensitivity analysis is also performed, which corroborates the main result.

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Energy Specializations: Energy Security and Geopolitics – International Energy Organizations; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
O19 - International Linkages to Development; Role of International Organizations
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: OPEC, climate change, CO2 emissions, carbon policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-2


Published in Volume 30, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.