The green paradox and budgetary institutions

Abstract

We examine oil production strategies in response to the rise of alternative energy in context of Saudi Arabia and the United States. In a unified simultaneous equation model (SEM), over the period 1976–2015, we investigate the extent to which budget balance behaviour explains the nature of oil production strategies. We find that green regulations have a positive impact on U.S. oil production, while an inverse relationship holds for Saudi Arabia. We argue that the nature of budgetary institutions prevents Saudi Arabia from following a profit maximising behaviour. Saudi Arabia is incentivised to ensure political cohesion through adopting a procyclical fiscal policy. Rather, regulators seem incentivised to channel surplus towards individuals to gain popularity in the United States. A thriving shale oil industry is a plausible rationale for U.S. production strategies. Also known as a weak green paradox, this is problematic for climate change initiatives to reduce global emissions. Climate experts may wish to pay more attention to the supply-side of oil-markets when designing decarbonisation plans. The results challenge conventional wisdom of the green paradox neglecting the role of incentive structure between different types of oil producers.