Market Power, Production (Mis)Allocation and OPEC

Abstract

This paper estimates the extent to which market power is a source of production misallocation. Productive inefficiency occurs through more production being allocated to higher-cost units of production, and less production to lower-cost production units, conditional on a fixed aggregate quantity. We rely on rich micro-data covering the global market for crude oil, from 1970 to 2014, to quantify the extent of productive misallocation attributable to market power exerted by the OPEC. We find substantial productive inefficiency attributable to market power, ranging from 14.1 percent to 21.9 percent of the total productive inefficiency, or 105 to 163 billion USD.

OPEC, Shale Oil, and Global Warming - On the Importance of the Order of Extraction

“…Furthermore, they show that 22 percent of this efficiency loss (i.e., 163 billion US$) can be attributed to OPEC's market power. It is interesting to note that while both Asker et al (2017) and our paper point to the importance of the inefficiencies due to OPEC's market power, we get to this conclusion from quite different approaches, an indication of the robustness of our results.…”

“…The importance of the inefficient order of use of the different oil reserves is corroborated by the recent findings of Asker et al (2017). While we use a stylized model with two different types of reserves, they use a rich micro-dataset on production costs and reserves of 11,455 oil fields (constituting 99.9 percent of global reserves).…”

“…In contrast with Asker et al (2017), in our paper the time path of aggregate oil supply is not exogenous. The extraction paths for the entire time horizon are obtained as equilibrium paths from a theoretical model of resource extraction that incorporates market power, competition by a fringe and the existence of a backstop technology.…”

“…They construct a counterfactual scenario for the period 1970-2100 (when all reserves are assumed depleted) in which these fields are extracted according to the Herfindahl rule, where from 2014 until 2100 it is assumed that oil demand increases at an annual rate of 1.3 percent and actual production satisfies the Herfindahl rule. Asker et al (2017) find that the total costs of production misallocation between oil fields add up to 744 billion US$ (measured at 2014 prices), which equals 30 percent of the present value of actual extraction costs since 1970. Furthermore, they show that 22 percent of this efficiency loss (i.e., 163 billion US$) can be attributed to OPEC's market power.…”

“…Hence, we take into account that market power not only influences the order but also the speed of extraction. Moreover, while Asker et al (2017) limit their attention to the production cost inefficiency due to OPEC's market power, we examine the repercussions of the order of extraction for global warming, due to differences in both extraction costs as well as carbon emissions factors between oil fields. Furthermore, we use our theoretical model to examine different environmental policies' implications and to perform a welfare analysis.…”