Oil Price Instability and Domestic Energy Substitution for Imported Oil*

This paper considers the effects of unstable world oil prices on domestic firms seeking substitutes for imported oil. Price instability manifested as price uncertainty is shown to inhibit domestic potential competitors' substitution activities, being analogous to a tax imposed on domestic firms by the dominant oil‐exporters. This tax analogue of price uncertainty is in distinction to the mutual gain scenario of stochastic limit pricing when there is price variability but no uncertainty.