Fossil resource market power and capital markets

Abstract

Supplying a crucial exhaustible resource to the world market induces profound repercussions in the capital markets. Employing a two-country model with international trade, we examine how a resource-rich country with monopolistic market power accounts for this interplay with the capital market in its extraction decision over time. We investigate new supply motives resulting from the general-equilibrium feedbacks and from capital asset holdings of the resource-rich country. Recognizing the influence of resource supply on capital returns can lead the resource monopolist to accelerate or postpone extraction while the influence on capital accumulation poses an incentive to accelerate extraction and to exploit the importers’ increased future resource dependence. Overall, in the reference calibration, the conventional conservationist bias of resource market power is reversed. The general-equilibrium supply motives substantially alter the resource monopolist’s reaction to more competitive capital-intensive resource substitutes, demonstrating the relevance of our observations for future technological change. Similarly, these supply motives may reverse the effects of a future tax on the exporting countries’ asset holdings.