Monday, October 29, 2012

Green Technologies and the Protracted End to the Age of Oil: A strategic analysis

New OxCarre paper by Niko Jaakkola: This paper considers competition between an oil exporter depleting
and selling an exhaustible resource, and an oil importer able to gradually lower the cost of substitutes. R&D into clean fuels begins before the substitutes are competitive, in order to reduce overall development
costs. The substitute constrains the oil exporter's market power: after an initial Hotelling-type stage, oil pricing becomes constrained by the ever-cheaper substitute technology. Supply is thus non-monotonic, initially falling, then forced up by competition from the substitute. Climate change slows down substitute development: rapid R&D forces the exporter to extract oil faster, aggravating near-term environmental impacts. If oil extraction becomes more expensive as supplies are depleted, the importer switches into clean fuels once these price oil out of the market; technological development will eventually be hastened to leave more of the oil locked underground. Novel numerical methods for solving PDEs are introduced into a differential game context.

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