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Beautiful and not So Beautiful Minds: An Introductory Essay on Economic Theory and the Supply of Oil

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  • Ferdinand E. Banks

Abstract

Both the teaching and the studying of energy economics have been severely disadvantaged by the emphasis placed on the Hotelling theory of resource exhaustion. For example, in the study of oil and gas economics, this unrealistic construction is fundamentally irrelevant, because it does not consider fixed investment, nor the (real) options associated with such things as starting or interrupting production. In addition, both economics students and teachers have failed to recognize the crucial importance of the reserves‐to production ratio, as well as the research of M. King Hubbert. Among other things, this oversight has led to an irrational optimism, where expectations of the future availability of oil are concerned. To be more specific, the probability that the oil pessimists are correct is large enough to justify the attachment of a sizable discount factor to any claim of future oil abundance.

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  • Ferdinand E. Banks, 2004. "Beautiful and not So Beautiful Minds: An Introductory Essay on Economic Theory and the Supply of Oil," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 28(1), pages 27-62, March.
    • Handle: RePEc:bla:opecrv:v:28:y:2004:i:1:p:27-62
    DOI: 10.1111/j.0277-0180.2004.00078.x
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    References listed on IDEAS

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    1. Ferdinand E. Banks, 1987. "The Reserve-Production Ratio," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 147-151.
    2. Thompson, Andrew C., 2001. "The Hotelling Principle, backwardation of futures prices and the values of developed petroleum reserves -- the production constraint hypothesis," Resource and Energy Economics, Elsevier, vol. 23(2), pages 133-156, April.
    3. Thorvaldur Gylfason, 2002. "Mother Earth: Ally or Adversary?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 3(1), pages 7-24, January.
    4. Banks, F. E., 1974. "A note on some theoretical issues of resource depletion," Journal of Economic Theory, Elsevier, vol. 9(2), pages 238-243, October.
    5. Farzin, Y. H., 2001. "The impact of oil price on additions to US proven reserves," Resource and Energy Economics, Elsevier, vol. 23(3), pages 271-292, July.
    6. Alhajji, A. F. & Huettner, David, 2000. "OPEC and other commodity cartels: a comparison," Energy Policy, Elsevier, vol. 28(15), pages 1151-1164, December.
    7. Ferdinand E Banks, 2001. "Global Finance and Financial Markets:A Modern Introduction," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 4439, February.
    8. Robert A. Marshalla & Dale M. Nesbitt, 1986. "Future World Oil Prices and Production Levels: An Economic Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-22.
    9. Graham A. Davis, 1996. "Option Premiums in Mineral Asset Pricing: Are They Important?," Land Economics, University of Wisconsin Press, vol. 72(2), pages 167-186.
    10. Banks, Ferdinand E., 1991. "`Paper' oil, `real' oil, and the price of oil," Energy Policy, Elsevier, vol. 19(6), pages 517-525.
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    Cited by:

    1. Izabel Rigo Portocarrero, 2012. "Brasil: la sostenibilidad de la agroindustria de la caña de azúcar y las oportunidades de exportación de bioetanol a la Unión Europea," Post-Print halshs-00875174, HAL.
    2. Courage Mlambo, 2022. "Non-Renewable Resources and Sustainable Resource Extraction: An Empirical Test of the Hotelling Rule’s Significance to Gold Extraction in South Africa," Sustainability, MDPI, vol. 14(17), pages 1-17, August.
    3. Stela Cani, 2009. "Resource Abundance, Mineral Funds and Institutional Quality," Economics Discussion Papers em-dp2009-04, Department of Economics, University of Reading.
    4. Tobias Kronenberg, 2008. "Should We Worry About The Failure Of The Hotelling Rule?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 774-793, September.
    5. Ferdinand E. Banks, 2004. "Economic Theory and a Faith-Based Approach to Global Warming," Energy & Environment, , vol. 15(5), pages 837-852, September.
    6. Brown, Mark T. & Cohen, Matthew J. & Sweeney, Sharlynn, 2009. "Predicting national sustainability: The convergence of energetic, economic and environmental realities," Ecological Modelling, Elsevier, vol. 220(23), pages 3424-3438.

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