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Adelman's Rule and the Petroleum Firm

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  • Robert D. Cairns and Graham A. Davis

Abstract

Observing that net prices do not rise as predicted and that resource stocks are not fixed, Adelman questions Hotelling's model of an exhaustible resource. He cites a rule of thumb for valuing oil reserves which is about onehalf that given by the Hotelling valuation principle. We apply an optimization model to a stylized characterization of an oil reservoir. Adelman's valuation rule is confirmed. An r-percent rule emerges as well, but it is not Hotelling's rule. We end the paper with our interpretation of Hotelling's rule. We also consider the role of investment in augmenting the quantities of a resource currently extracted.

Suggested Citation

  • Robert D. Cairns and Graham A. Davis, 2001. "Adelman's Rule and the Petroleum Firm," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 31-54.
    • Handle: RePEc:aen:journl:2001v22-03-a02
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    Cited by:

    1. Leach, Andrew & Mason, Charles F. & Veld, Klaas van ‘t, 2011. "Co-optimization of enhanced oil recovery and carbon sequestration," Resource and Energy Economics, Elsevier, vol. 33(4), pages 893-912.
    2. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    3. John Hartwick, 2012. "Higher Quality Exhaustible Resource Deposits Receiving Higher Or Lower Resource Rents In A Simple Spatial Framework," Working Paper 1306, Economics Department, Queen's University.
    4. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2021. "(Bio-)Fuel mandating and the green paradox," Energy Economics, Elsevier, vol. 95(C).
    5. repec:elg:eechap:14605_1 is not listed on IDEAS
    6. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2015. "Modeling peak oil and the geological constraints on oil production," Resource and Energy Economics, Elsevier, vol. 40(C), pages 36-56.
    7. Michel Moreaux & Jean-Pierre Amigues & Gerard van der Meijden & Cees Withagen, "undated". "Carbon Capture: Storage vs. Utilization," Tinbergen Institute Discussion Papers 22-041/VIII, Tinbergen Institute.
    8. Roberts, Gavin & Barbier, Edward & van 't Veld, Klaas, 2019. "Global emissions from crude oil: The effect of oil-deposit heterogeneity," Energy Policy, Elsevier, vol. 132(C), pages 654-664.
    9. Smith, James L., 2014. "A parsimonious model of tax avoidance and distortions in petroleum exploration and development," Energy Economics, Elsevier, vol. 43(C), pages 140-157.
    10. Hansen, T.A., 2022. "Stranded assets and reduced profits: Analyzing the economic underpinnings of the fossil fuel industry's resistance to climate stabilization," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
    11. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    12. Robert D. Cairns and Graham A. Davis, 2015. "Mineral Depletion and the Rules of Resource Dynamics," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    13. Hart, Rob, 2016. "Non-renewable resources in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 1-20.
    14. Johnson Kakeu, 2023. "Concerns for Long-Run Risks and Natural Resource Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(4), pages 1051-1093, April.
    15. Okullo, Samuel J. & Reynès, Frédéric, 2016. "Imperfect cartelization in OPEC," Energy Economics, Elsevier, vol. 60(C), pages 333-344.
    16. Niko Jaakkola, 2012. "Monopolistic sequestration of European carbon emissions," OxCarre Working Papers 098, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    17. Wang, Qiao & Balvers, Ronald, 2021. "Determinants and predictability of commodity producer returns," Journal of Banking & Finance, Elsevier, vol. 133(C).
    18. Jakobsson, Kristofer & Bentley, Roger & Söderbergh, Bengt & Aleklett, Kjell, 2012. "The end of cheap oil: Bottom-up economic and geologic modeling of aggregate oil production curves," Energy Policy, Elsevier, vol. 41(C), pages 860-870.
    19. van den Bijgaart, Inge & Rodriguez, Mauricio, 2023. "Closing wells: Fossil development and abandonment in the energy transition," Resource and Energy Economics, Elsevier, vol. 74(C).
    20. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.
    21. van den Bijgaart, Inge & Rodriguez, Mauricio, 2020. "Closing wells; fossil exploration and abandonment in the energy transition," Working Papers in Economics 789, University of Gothenburg, Department of Economics.
    22. Yarram, Subba Reddy & Rice, John, 2017. "Executive compensation among Australian mining and non-mining firms: Risk taking, long and short-term incentives," Economic Modelling, Elsevier, vol. 64(C), pages 211-220.
    23. Cairns, Robert D., 2004. "Principles of green accounting for renewable and nonrenewable energy resources," Energy Policy, Elsevier, vol. 32(2), pages 261-267, January.
    24. Linder, Eric & Marbuah, George, 2019. "The cost of transparency: Stock market reactions to introduction of the Extractive Sector Transparency Measures Act in Canada," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    25. John Hartwick, 2011. "Higher Quality Exhaustible Resource Deposits Receiving Higher Or Lower Resource Rents In A Simple Spatial Framework," Working Paper 1281, Economics Department, Queen's University.

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    JEL classification:

    • F0 - International Economics - - General

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