Competition and collusion with exhaustible resources : the case of the crude oil market

Abstract

In this thesis I analyze the dynamics of competition and collusion in exhaustible resource markets, with a special focus on the market for crude oil. Theoretical models with perfect competition, monopoly, and Cournot duopoly are developed and illustrated. Theory of collusion is then considered, and I discuss how exhaustibility affects the possibility of collusion. It is shown that small reserve holders only will find it profitable to join a cartel if the quotas are allocated in favor of the small reserve holders. In the latter parts of the paper I show how risk aversion and the recent weakness of Saudi Arabia affect best-response strategies, and how an increase in risk aversion might promote cartel stability when quota allocation is based on production capacity. Throughout the paper I confront the theories with actual data.