Question

2. Explain two reasons why real-world oil prices don't evolve smoothly at the rate of interest the way our stylized model predicts. 3. Explain in words why having renewables be more competitive with coal in the future increases the extraction of coal today, but decreases in natural gas prices from fracking decreased the extraction of coal today.

Answer 1

Real world prices of crude oil dont behave in line with interest rate fluctuations because they are driven by supply and demand dynamic and geopolitical factors which lead to widescale deviation and volatility. Also due to high trading volumes on crud eoil futures contract on Commodity exchanges create further volatility and standard deviation.

Renewable energy sources like solar powerband hydroelectric will naturally drive devices, automation and industries innfuture and thus demand for renewable sources like coal will diminish and thus to mark higher profits and higher sales revenues, firms indulge in over extraction and sell using long term contract to maximise revenue and thus extraction gets propelled. However decrease in frscking natural gas implies that profits decrease substantially and thus coal extraction limits itself to avoid colloquial losses as loss gets maximum at lower prices.