An oligopoly model for analysing oil extraction in the presence of renewable substitutes

Abstract

ABSTRACT Optimal oil extraction models have often focused on economic costs and benefits in oil production. Anthropogenic pressures in accelerating climate change have become increasingly important in energy policy analysis. Renewables have gained prominence in climate policy analysis and academic discourse, and to some extent with different governments. The two strands of literature, the economically optimal extraction and climate change induced renewable substitutions, have developed separately. A Cournot-Nash equilibrium model was formulated and applied to conduct simulation experiments over a longer time horizon of 150 years. The findings indicated that if there is no renewable substitution, global oil reserves will be fully extracted in less than eighty-seven years, with slight differences depending on variations on marginal cost of oil extraction. Further, reductions in unit cost of renewable production have a greater impact on oil extraction than the respective marginal cost of oil extraction. If the unit cost of renewables falls closer to the level of currently low marginal cost for oil producers, then renewable substitution for oil would accelerate – rendering oil extraction uneconomical long before known oil reserves would be exhausted.