International market power in oil and strategic responses to climate policy

by Khalid Aljihrish

Institution: Colorado School of Mines
Year: 2015
Keywords: Climate Policy; General Equilibrium; Oil; Energy Economics; Carbon Leakage; Market Power
Posted: 02/05/2017
Record ID: 2134674
Full text PDF: http://hdl.handle.net/11124/20151


Effective sub-global initiatives to limit carbon emissions will result in substantial changes in the international demand for fossil energy, and this transfers policy costs to energy exporters. Most quantitative analysis of carbon policy, however, does not consider Saudi Arabia's significant market power in crude oil. The literature largely ignores the fact that Saudi Arabia might change export markups in a way that mitigates the climate policy costs. Against this background, this dissertation addresses three primary concerns. First, under what conditions does Saudi Arabia have the ability to respond to oil demand shocks. Second, what are the impacts of a sub-global climate policy on regional welfare and carbon leakage levels and what are the effects of a Saudi strategic reaction on those levels. Third, to what extent can the climate coalition retaliate to Saudi Arabia's reaction and what are the results of this game between the coalition and Saudi Arabia on welfare and carbon leakage. We adopt a global numeric model based on GTAP data but modify it to consider the benchmark divergence between the marginal cost of producing crude oil in Saudi Arabia and the world price of crude oil. Under this consideration, we find that Saudi Arabia has ample scope for a strategic reaction to external climate policies. We find that Saudi Arabia's reaction significantly alters relative prices of fossil fuels and therefore the regional share of the climate policy burden. Increasing the relative price of oil, as a result of Saudi Arabia's strategic reaction, reduces consumption of oil globally and drives large reductions in carbon leakage. This comes at the expense of reductions in oil importers welfare, which a large portion of the coalition falls under. The coalition has market power on the oil import side and therefore has the incentive to retaliate to Saudi Arabia's reaction. We find historical evidence for an agreement between Saudi Arabia and the West, particularly the US, that answers the question of why the coalition and Saudi Arabia do not exercise their respective oil market power in the benchmark data. The dissolution of this agreement as a result of the coalition taking action on climate change creates the incentive for both parties, the coalition and Saudi Arabia, to exploit their oil market power. This break-down of the agreement leads to reduced welfare levels for both parties and increased carbon leakage. Advisors/Committee Members: Balistreri, Edward J. (Edward Jay) (advisor), Carbone, Jared C. (committee member), Eggert, Roderick G. (committee member), Amery, Hussein A., 1958- (committee member).