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Oil Price Hikes and Development Triggers in Peace and War

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  • Miller, Marcus
  • Zhang, Lei

Abstract

The theory of irreversible investment predicts that development of an oil field should take place when a unique 'price trigger' is passed. At the start of the 1990/91 Gulf War, however, oil prices promptly doubled, only to fall back to their previous level when peace returned six months later. To incorporate such large but 'transitory' price hikes, we evaluate the profitability of an oil field contingent on war and peace and calculate separate triggers in each case. For plausible parameter values, we find that the switch between these development triggers is about 45 of the price hike caused by the war. The price hike is therefore equivalent to a permanent price increase of only a quarter of its size. Copyright 1996 by Royal Economic Society.

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  • Miller, Marcus & Zhang, Lei, 1996. "Oil Price Hikes and Development Triggers in Peace and War," Economic Journal, Royal Economic Society, vol. 106(435), pages 445-457, March.
    • Handle: RePEc:ecj:econjl:v:106:y:1996:i:435:p:445-57
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    1. repec:ipg:wpaper:2014-565 is not listed on IDEAS
    2. Carlos José Peña Parra, 2013. "Incertidumbre, gobernabilidad y crecimiento económico. Venezuela 1968-2010," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 15(28), pages 313-331, January-J.
    3. Gronwald, Marc, 2012. "A characterization of oil price behavior — Evidence from jump models," Energy Economics, Elsevier, vol. 34(5), pages 1310-1317.
    4. Gronwald, Marc, 2016. "Explosive oil prices," Energy Economics, Elsevier, vol. 60(C), pages 1-5.
    5. Nicolai V. Kuminoff & Ada Wossink, 2010. "Why Isn’t More US Farmland Organic?," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 240-258, June.

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