Rapacious Oil Exploration in Face of Regime Switches: Breakthrough Renewable Energy and Dynamic Resource Wars

Abstract

Rapacious fossil fuel extraction occurs if fossil fuel producers fear that there is a probability that their under-the-ground assets becomes worth less. They show that rapacious depletion of oil reserves occurs if there is a probability of a breakthrough renewable energy coming to the market or a probability of climate policy finally becoming seriously ambitious. These are examples of one-way regime switches leading to the so-called Green Paradox. Two-way regimes switches also lead to rapacious oil depletion. They occur if there is a chance of being removed from office in a partisan political context with perennial election cycles or if there are dynamic resource wars with the hazard of being removed from office dependent on fighting efforts. This rapacity effect is stronger in societies with bad institutions and lack of political cohesiveness.

Keywords: Regime Switches, Breakthrough Renewable Energy, Green Paradox, Resource Wars, Contest Success Functions, Political Cohesiveness, Confiscation Risk, Taxation, Oil Reserves Uncertainty, Exhaustible Resources, Exploration Investment, Hold-Up Problem

JEL Classification: D81, H20, Q31, Q38