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Aggressive oil extraction and precautionary saving: Coping with volatility

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  • van der Ploeg, Frederick

Abstract

The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non-oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 94 (2010)
Issue (Month): 5-6 (June)
Pages: 421-433

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Handle: RePEc:eee:pubeco:v:94:y:2010:i:5-6:p:421-433

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Hotelling rule Tax smoothing Prudence Vigorous oil extraction Precautionary saving Taxation and under-spending Oil price volatility Uncertain economic prospects and oil reserves;

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Citations

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Cited by:
  1. Paul Collier & Frederick van der Ploeg & Michael Spence & Anthony J Venables, 2009. "Managing Resource Revenues in Developing Economies," OxCarre Working Papers 015, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Torfinn Harding & Frederick Van der Ploeg, 2009. "Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations," CESifo Working Paper Series 2830, CESifo Group Munich.
  3. Cherif, Reda & Hasanov, Fuad, 2013. "Oil Exporters’ Dilemma: How Much to Save and How Much to Invest," World Development, Elsevier, vol. 52(C), pages 120-131.
  4. Torfinn Harding & Frederick van der Ploeg, 2012. "Official forecasts and management of oil windfalls," Discussion Papers 676, Research Department of Statistics Norway.
  5. Frederick van der Ploeg & Anthony J. Venables, 2012. "Natural Resource Wealth: The Challenge of Managing a Windfall," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 315-337, 07.
  6. Frederick van der Ploeg, 2012. "Resource Wars and Confiscation Risk," OxCarre Working Papers 097, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  7. Ton S. van den Bremer & Frederick van der Ploeg, 2012. "How to Spend a Windfall: Dealing with volatility and capital scarcity," OxCarre Working Papers 085, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  8. Tsani, Stella, 2013. "Natural resources, governance and institutional quality: The role of resource funds," Resources Policy, Elsevier, vol. 38(2), pages 181-195.
  9. Frederick Van der Ploeg, 2010. "Natural Resources: Curse or Blessing?," CESifo Working Paper Series 3125, CESifo Group Munich.
  10. Steigum, Erling & Thøgersen, Øystein, 2013. "A crisis not wasted – Institutional and structural reforms behind Norway’s strong macroeconomic performance," Discussion Paper Series in Economics 18/2013, Department of Economics, Norwegian School of Economics.
  11. Djiofack, Calvin Z. & Omgba, Luc Désiré, 2011. "Oil depletion and development in Cameroon: A critical appraisal of the permanent income hypothesis," Energy Policy, Elsevier, vol. 39(11), pages 7202-7216.

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