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A Theory of Price Caps on Non-Renewable Resources

Author

Listed:
  • Simon Johnson
  • Lukasz Rachel
  • Catherine Wolfram

Abstract

What is the optimal response of an exhaustible resource producer to sanctions in the form of a price cap? This paper develops a dynamic framework incorporating stochastic prices, financial frictions, and market power to study this novel tool of statecraft. A binding price cap can incentivize increased extraction, stabilizing prices in the global market. But the cap’s effectiveness diminishes when the policy is leaky or is weakly enforced, as seen with the G7 price cap on Russian oil. Such imperfections introduce a trade-off between market stability and the welfare of the sanctioned producer. We provide a systematic approach to setting an optimal cap level in these circumstances.

Suggested Citation

  • Simon Johnson & Lukasz Rachel & Catherine Wolfram, 2023. "A Theory of Price Caps on Non-Renewable Resources," NBER Working Papers 31347, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31347
    Note: EEE IFM
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    Cited by:

    1. Johnson, Simon & Rachel, Lukasz & Wolfram, Catherine, 2023. "Design and implementation of the price cap on Russian oil exports," Journal of Comparative Economics, Elsevier, vol. 51(4), pages 1244-1252.
    2. Gornemann, Nils & Hildebrand, Sebastian & Kuester, Keith, 2024. "Limited (energy) supply, monetary policy, and sunspots," European Economic Review, Elsevier, vol. 168(C).
    3. Christiane Baumeister, 2023. "Pandemic, War, Inflation: Oil Markets at a Crossroads?," NBER Working Papers 31496, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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