How Does the Cost of Capital Affect Oil Production?

Helena Cordt, Julien Daubanes, and Yiding Ma

October 2026

In the spirit of green finance taxonomies, restricting fossil-fuel producers’ access to funds is hoped to help address the climate problem. We develop a project-level model of oil production, calibrate it to the universe of U.S. and Canadian oil projects producible over 2000-2024, and simulate the effects of the cost of capital. Modest increases in this cost are counterproductive, increasing oil production through industry short-termism while reducing project value. Effective costs of capital are unrealistically large, at odds with projects’ internal rates of return. At the industry level, a higher cost of capital generates equilibrium adjustments that boost oil profitability.

JEL codes: G1; H20; Q31
Keywords: Oil divestment; Green finance; Short-termism; Unintended policy impact; Internal rates of return