An Economic Model of Oil Exploration and Extraction
- 400 Downloads
In this paper we present empirical facts on oil exploitation and a model that can replicate some of these facts. In particular, we show that the time path of the oil price, on the one hand, and the extraction rate, on the other hand, seem to follow a U-shaped and an inverted U-shaped relationship, respectively, which is confirmed by simple non-parametric estimations. Next, we present a theoretical model where a monopolistic resource owner maximizes inter-temporal profits from exploiting a non-renewable resource where the price of the resource depends on the extraction rate and on cumulated past extraction. The resource is finite and only a part of the resource is known while the rest has not yet been discovered. The analysis of that model demonstrates that the extraction rate and the price of the resource show the empirically observed pattern if the stock of the initially known resource is small.
KeywordsNon-renewable resources Optimal control Non-parametric estimation Oil production
JEL ClassificationQ30 C61
Unable to display preview. Download preview PDF.
- BP. (2006). BP Statistical Review of World Energy 2006. London.Google Scholar
- Conrad J.M., Clark C.W. (1987) Natural resource economics. Cambridge University Press, CambridgeGoogle Scholar
- Dasgupta P.S., Heal G.M. (1979) Economic Theory and Exhaustible Resources. Cambridge University Press, CambridgeGoogle Scholar
- Energy Information Administration (2007) Annual energy report. Report No DOE/EIA-0384. Washington, D.C.: Energy Information AdministrationGoogle Scholar
- Hamilton, J.D. (2008) Understanding crude oil prices. National Bureau of Economic Research, Working Paper 14492. Massachusetts: National Bureau of Economic Research. http://www.nber.org/papers/w14492. Accessed 02 May 2011.
- Hubbert M.K. (1956) Nuclear Energy and the Fossil Fuels. Drilling and Production Practice American Petroleum Institute, San AntonioGoogle Scholar
- Khanna, N. (2003) On the economics of non-renewable resources. In J. M. Gowdy (ed.), Economics interactions with other disciplines. Oxford: Encyclopedia of Life Support Systems (EOLSS). http://www.eolss.net. Accessed 02 May 2011.
- Krautkraemer, J.A. (2005) Economics of natural resource scarcity: The state of the debate. Resources for the future, discussion paper 05-14. Retrived from http://www.rff.org. Accessed 02 May 2011.
- Meadows D.L. (1972) The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind. Universe Books, New YorkGoogle Scholar
- Schindler, J., & Zittel, W. (2008) Crude oil. The supply outlook. (Revised Edition February 2008). Ottobrunn: Energy Watch Group Ludwig-Boelkow-Foundation.Google Scholar