Cartel oil shocks and the environment

A significant body of scientific evidence supports the hypothesis that recent accumulations of carbon dioxide in the atmosphere, and associated changes in the climate, are attributable to the international use of fossil fuels. This evidence includes the observation that the ratio of human produced carbon dioxide to naturally produced carbon dioxide is increasing over time. Yet the scientific community is unable to employ the "gold standard" of hypothesis testing: randomized controlled trials. That is, there is no way to create placebo earths with no fossil fuel use and compare their climates to "treatment" earths in which fossil fuels are used and carbon dioxide is created by human activity. We employ a natural experiment in order to address this challenge. The Organization of Petroleum Exporting Countries (OPEC) regularly restricts output of petroleum. This output restriction is plausibly unrelated to the state of the environment and, hence, not subject to reverse causality running from the state of the environment to the use of fossil fuels. However, the cartel's coordination will alter supply which will, in turn, alter the level of prices and subsequent fossil fuel consumption. For these reasons we use OPEC output restrictions as an exogenous source of variation in fossil fuel prices and the rate of fossil fuel usage. This approach allows us to generate estimates of fossil fuels' role in the generation of carbon dioxide which are not susceptible to endogeneity problems. Consequently, our estimates of human contributions to greenhouse gas emissions and associated increases in temperature and other adverse consequences are free of the bias which might occur due to reverse causality. We utilize monthly panel data related to crude oil production, crude oil consumption and CO2 emissions at the country level. We perform panel data analysis on data from the Energy Information Administration and archived OPEC Monthly Oil Market Reports. Results suggest that there is a significant change in the global supply of crude oil related to OPEC's supply restrictions and that this results in a measurable change in global carbon emissions. We explore the policy implications of our estimates and suggest topics for future research.