Monopolistic Recycling of Oil Revenue and Intertemporal Bias in Oil Depletion and Trade

Abstract

This paper investigates oil depletion and trade when monopolistic oil producers also exercise monopoly power in the capital market. A two-period model views collusively organized oil producers with an initial trade surplus and a subsequent deficit. When monopoly power in the capital market is applied to the disadvantage of borrowers, less oil is initially made available to oil importers than if the interest rate had been competitively determined. This depletion bias, however, is reversed if, because of incentives for capital accumulation, it is to the advantage of the oil producers to subsidize lending to the oil importers. In either case the bias in oil depletion due to monopolistic recycling of oil revenue is greater, the more vulnerable are oil importers' incomes to a curtailment of oil supplies.