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Dynamic Investment In Extraction Capacity Of Exhaustible Resources

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  • Hamed Ghoddusi

Abstract

This paper studies a resource extraction problem with capacity constraints, expansion options and stochastic demand process. The producer has to decide on the optimal rate of extraction and the optimal time to build further capacity simultaneously. Using numerical methods to solve the problem, it is shown that previous results which suggest that extraction capacity should be built at the beginning, are not necessarily true under uncertainty. I derive equations for the optimal time to build extra capacity. The results of this paper can contribute to better understanding of long‐run energy and commodity supply.

Suggested Citation

  • Hamed Ghoddusi, 2010. "Dynamic Investment In Extraction Capacity Of Exhaustible Resources," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(3), pages 359-373, July.
    • Handle: RePEc:bla:scotjp:v:57:y:2010:i:3:p:359-373
    DOI: 10.1111/j.1467-9485.2009.00522.x
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    References listed on IDEAS

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    1. Murray Carlson & Zeigham Khokher & Sheridan Titman, 2007. "Equilibrium Exhaustible Resource Price Dynamics," Journal of Finance, American Finance Association, vol. 62(4), pages 1663-1703, August.
    2. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
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    Cited by:

    1. Di Corato, Luca, 2013. "Profit sharing under the threat of nationalization," Resource and Energy Economics, Elsevier, vol. 35(3), pages 295-315.
    2. Rodriguez Acosta, Mauricio, 2018. "Resource management under endogenous risk of expropriation," Resource and Energy Economics, Elsevier, vol. 52(C), pages 1-17.
    3. Robert C Ready, 2018. "Oil Prices and the Stock Market [The vix, the variance premium and stock market volatility]," Review of Finance, European Finance Association, vol. 22(1), pages 155-176.
    4. Graham Davis, 2011. "The resource drag," International Economics and Economic Policy, Springer, vol. 8(2), pages 155-176, June.
    5. Rodriguez Acosta, Mauricio, 2016. "Essays in political economy and resource economic : A macroeconomic approach," Other publications TiSEM 1e39ef1b-43a2-4f95-892c-6, Tilburg University, School of Economics and Management.
    6. Gilbert Kollenbach, 2017. "Endogenous growth with a limited fossil fuel extraction capacity," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(1), pages 233-272, February.

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