Fracking, Renewables, and Mean Field Games

Abstract

The dramatic decline in oil prices, from around $110 per barrel in June 2014 to less than $40 in March 2016, highlights the importance of competition between different energy sources. Indeed, the sustained price drop has been primarily attributed to OPEC's strategic decision not to curb its oil production in the face of increased supply of shale oil in the U.S., spurred by the technological innovation of “fracking.” We study how continuous time Cournot competitions, in which firms producing similar goods compete with one another by setting quantities, can be analyzed as continuum dynamic mean field games. In this context, we illustrate how the traditional oil producers may react in counterintuitive ways in the face of competition from alternative energy sources.