Effects of Transport Regulation on the Oil Market: Does Market Power Matter?

Posted by D. Daniel Sokol

Snorre Kverndokk, Ragnar Frisch Centre for Economic Research and Knut Einar Rosendahl, Norwegian University of Life Sciences (UMB) – Department of Economics and Resource Management; Statistics Norway – Research Department ask Effects of Transport Regulation on the Oil Market: Does Market Power Matter?

ABSTRACT: Instruments used to regulate the consumption of oil in the transport sector include fuel taxes, biofuel requirements, and fuel‐efficiency standards. However, the effects that these have on oil consumption and price vary. If market power is present in the oil market, the directions of change in consumption and price might contrast with those in a competitive market. As a result, the market structure affects not only the effectiveness of the policy instruments used to reduce oil consumption, but also the terms of trade and carbon leakage. In particular, reduced oil consumption, as a result of increased fuel‐efficiency standards, will unambiguously increase the price of oil under a monopoly.