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Short Run Effects of Bleaker Prospects for Oligopolistic Producers of a Non-renewable Resource

Open Access Article

Abstract:
In a non-renewable resource market with imperfect competition, both the resource rent and the current market influence large resource owners' optimal supply. New information regarding future market conditions that affect the resource rent will consequently impact current supply. Bleaker demand prospects tend to accelerate resource extraction. We show, however, that it may slow down early extraction by producers with sufficiently large reserves and thus small resource rents. The reason is that the supply from such producers is driven more by current market considerations than concern about resource scarcity. As producers with relatively smaller reserves accelerate their supply in response to bleaker demand prospects, producers with sufficiently large reserves will reduce their current supply. The surge in shale gas production will reduce residual demand facing suppliers to the European gas market. We demonstrate the effects of this in a numerical model. Most gas producers accelerate their supply while Russia reduces its supply slightly and thus loses market shares even before the additional gas enters the market.

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Energy Specializations: Natural Gas – Policy and Regulation; Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy; Natural Gas – Imports and Exports; Petroleum – Imports and Exports

JEL Codes: Q21: Renewable Resources and Conservation: Demand and Supply; Prices, Q20: Renewable Resources and Conservation: General, Q42: Alternative Energy Sources, Q41: Energy: Demand and Supply; Prices, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis, Q35: Hydrocarbon Resources, L11: Production, Pricing, and Market Structure; Size Distribution of Firms

Keywords: Resource extraction, Cournot competition, European gas market

DOI: 10.5547/01956574.37.3.kgr

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Published in Volume 37, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.