Surreal illustration of oil derricks merging under a stormy sky, symbolizing the clash between industry and environmental concerns.

Resource Wars: How Mergers and Environmental Policies Clash in Nonrenewable Industries

Theo Raines in Climate & Environment August 2025 • 4 min read.

"Uncover the surprising link between oil industry mergers, environmental regulations, and the future of our planet. Are mergers speeding up resource depletion?"

The world's nonrenewable resource industries, particularly oil and gas, are no strangers to mergers and acquisitions (M&A). These activities account for a substantial slice of the global GDP, and the trend shows no signs of slowing. From Standard Oil's early acquisitions to mega-mergers like ExxonMobil and BP Amoco, understanding the economic incentives and environmental implications behind these deals is crucial.

Economic studies, like one featured in the European Economic Review, delve into the profitability of horizontal mergers within these industries, a topic that has sparked debate among economists and environmentalists alike. These studies challenge conventional wisdom, such as the Salant, Switzer, and Reynolds (SSR) result, which questions the profitability of mergers unless a significant portion of the industry consolidates.

But what happens when environmental policies enter the equation? Can regulations designed to protect the environment inadvertently accelerate resource depletion? These are critical questions, especially as governments worldwide grapple with climate change and seek to implement effective environmental strategies. This article explores the complex interplay between mergers, environmental policies, and the fate of our planet's nonrenewable resources.

Why Do Oil Companies Merge? The Profit Puzzle

Surreal illustration of oil derricks merging under a stormy sky, symbolizing the clash between industry and environmental concerns.

One of the primary questions explored by economists is why companies in the nonrenewable resource sector pursue mergers so aggressively. Traditional economic models suggest that mergers should only be profitable if they create near-monopolies, but the reality in the oil and gas industry seems to defy this logic.

The European Economic Review study sheds light on this paradox by demonstrating that even small mergers (involving just two firms) can be profitable under certain conditions. Specifically, when each firm owns a small enough resource stock, a merger becomes an attractive proposition. This challenges the SSR result, which posits that mergers are only beneficial when a large portion of the market is controlled by the merged entity.

Resource Constraints: Unlike standard economic models, the nonrenewable resource sector operates under the constraint of finite resource stocks. This limitation alters the competitive dynamics and creates opportunities for even small mergers to increase profitability.
Market Power: Mergers allow firms to reduce their output, leading to higher prices. Competitors might want to increase their output to take advantage, but their extraction is limited.

In essence, the study reveals that resource constraints play a pivotal role in making mergers profitable, even when the merged entity doesn't dominate the market. This insight is particularly relevant in today's world, where concerns about resource scarcity and environmental sustainability are increasingly prominent.

The Environmental Paradox: Can Green Policies Backfire?

While environmental policies aim to mitigate the negative impacts of resource extraction, their interaction with industry mergers can produce unexpected outcomes. The study highlights a "green paradox," where policies intended to slow down extraction may, in some cases, accelerate it. A tax on extraction may prevent a merger from happening, which increases the speed of extraction.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1016/j.euroecorev.2018.08.008, Alternate LINK

Title: Mergers In Nonrenewable Resource Oligopolies And Environmental Policies

Subject: Economics and Econometrics

Journal: European Economic Review

Publisher: Elsevier BV

Authors: Hassan Benchekroun, Michèle Breton, Amrita Ray Chaudhuri

Published: 2019-01-01

Everything You Need To Know

Why are mergers so common in the oil and gas industry, even when they don't create near-monopolies?

Mergers in the oil and gas industries are often driven by the unique characteristic of finite resource stocks. Unlike standard economic models that assume unlimited resources, these industries operate under the constraint of limited nonrenewable resources. The European Economic Review study suggests that even small mergers can be profitable because resource constraints alter competitive dynamics, creating opportunities to increase profitability without dominating the market. This contradicts the Salant, Switzer, and Reynolds (SSR) result, which says mergers are only profitable when a significant portion of the industry consolidates.

What is the "green paradox," and how does it relate to environmental policies and resource extraction?

The "green paradox" refers to the counterintuitive situation where environmental policies, intended to slow down resource extraction, inadvertently accelerate it. For example, a tax on extraction may prevent a merger from happening, which increases the speed of extraction. Understanding this paradox is vital for designing effective environmental strategies that do not produce unintended consequences in the context of industry mergers.

How does the European Economic Review study's findings differ from the Salant, Switzer, and Reynolds (SSR) result regarding merger profitability?

The European Economic Review study challenges the conventional Salant, Switzer, and Reynolds (SSR) result. The SSR result suggests that mergers are only profitable if a large portion of the industry consolidates. However, the European Economic Review study demonstrates that even small mergers can be profitable when each firm owns a small enough resource stock. This is due to the resource constraints unique to the nonrenewable resource sector, which allows firms to reduce their output and increase prices without necessarily controlling a large market share.

How do environmental policies impact merger activity in nonrenewable resource industries?

Environmental policies can significantly influence mergers in nonrenewable resource industries by altering the economic incentives for these deals. For example, extraction taxes might deter mergers by making them less profitable, while other regulations could encourage firms to consolidate to achieve economies of scale or better comply with environmental standards. The interplay between these policies and merger activity can have complex and sometimes counterintuitive effects, such as the "green paradox."

What is the main economic incentive for oil companies to merge, considering the limited nature of nonrenewable resources?

The primary economic incentive is increased profitability, but this is influenced by the finite nature of nonrenewable resources. Mergers enable firms to reduce their output, leading to higher prices because competitors are limited in how much they can increase their own extraction. This dynamic is different from industries with unlimited resources, where increased production from competitors would offset the price increase. The European Economic Review study highlights that even small mergers can be profitable under these resource constraints, challenging traditional economic models like the Salant, Switzer, and Reynolds (SSR) result.