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Extracting Several Resource Deposits of Unknown Size: Optimal Order

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  • Murray C. Kemp
  • Ngo Van Long

    ()

Abstract

Oil companies often announce revised estimates of their reserves. This indicates that stock uncertainty is a prevalent feature of natural resource industries. In this paper we consider the multi-deposit case where resource extraction produces information about the size of reserves. We show that the optimal order of extracting resource deposits depends both on the informational characteristics of the extraction process and on the extraction costs. Differences in extraction costs, a key consideration highlighted in Solow and Wan (1976), must be balanced against the relative value of information generated by the extraction of various deposits. Our model supplies an explanation of why high cost deposits are sometimes extracted when lower cost deposits have not been exhausted. Les compagnies pétrolières révisent souvent les chiffres de leurs réserves, ce qui indique que l’incertitude concernant les stocks est prévalente. Nous considérons le cas où l’extraction donne des informations sur la taille des réserves. Nous prouvons que l’ordre optimal d’exploitation des stocks dépend des propriétés du processus d’extraction concernant la révélation d’information et des coûts. La différence des coûts, qui est une considération importante dans Solow and Wan (1976), doit être balancée contre la valeur informative des réserves. Notre modèle fournit une explication du fait que les réserves plus coûteuses sont parfois exploitées avant l’épuisement des réserves moins coûteuses.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2007s-10.

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Date of creation: 01 Apr 2007
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Handle: RePEc:cir:cirwor:2007s-10

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Related research

Keywords: order of extraction; value of information; uncertainty; ordre d’extraction; valeur de l’information; incertitude;

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References

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  1. Grossman, Sanford J & Kihlstrom, Richard E & Mirman, Leonard J, 1977. "A Bayesian Approach to the Production of Information and Learning by Doing," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 533-47, October.
  2. Glenn C. Loury, 1977. "The Optimal Exploitation of an Unknown Reserve," Discussion Papers 255, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Kumar, Ramesh C., 2005. "How to eat a cake of unknown size: A reconsideration," Journal of Environmental Economics and Management, Elsevier, vol. 50(2), pages 408-421, September.
  4. Reed, William J., 1984. "The effects of the risk of fire on the optimal rotation of a forest," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 180-190, June.
  5. David Levhari & Nissan Liviatan, 1977. "Notes on Hotelling's Economics of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 177-92, May.
  6. Amigues, J.-P. & Favard, P. & Gaudet, G. & Moreaux, M., 1996. "On The Optimal Order of Natural Resourse Use When the Capacity of the Inexhaustible Substitute is Limited," Papers 96.431, Toulouse - GREMAQ.
  7. John Hartwick, 1981. "Learning About and Exploiting Exhaustible Resource Deposits of Uncertain Size," Working Papers 456, Queen's University, Department of Economics.
  8. Long, Ngo Van, 1975. "Resource extraction under the uncertainty about possible nationalization," Journal of Economic Theory, Elsevier, vol. 10(1), pages 42-53, February.
  9. Jean-Pierre Amigues & Ngo Van Long & Michel Moreaux, 2006. "Ressources naturelles, impatience et progrès technique," Revue économique, Presses de Sciences-Po, vol. 57(2), pages 185-218.
  10. Long, Ngo Van, 1976. "Expectation Revision and Optimal Learning in a Foreign Investment Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 247-61, June.
  11. Monica Brezzi & Tze Leung Lai, 2000. "Incomplete Learning from Endogenous Data in Dynamic Allocation," Econometrica, Econometric Society, vol. 68(6), pages 1511-1516, November.
  12. Hartwick, John M. & Kemp, Murray C. & Van Long, Ngo, 1986. "Set-up costs and theory of exhaustible resources," Journal of Environmental Economics and Management, Elsevier, vol. 13(3), pages 212-224, September.
  13. Hartwick, John M, 1978. "Exploitation of Many Deposits of an Exhaustible Resource," Econometrica, Econometric Society, vol. 46(1), pages 201-17, January.
  14. Ramesh C. Kumar, 2002. "How long to eat a cake of unknown size? Optimal time horizon under uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 843-853, November.
  15. Hartwick, John M. & Yeung, David, 1985. "Preference for output price uncertainty by the non-renewable resource extracting firm," Economics Letters, Elsevier, vol. 19(1), pages 85-89.
  16. Robson, Arthur J., 1979. "Sequential exploitation of uncertain deposits of a depletable natural resource," Journal of Economic Theory, Elsevier, vol. 21(1), pages 88-110, August.
  17. Cropper, M. L., 1976. "Regulating activities with catastrophic environmental effects," Journal of Environmental Economics and Management, Elsevier, vol. 3(1), pages 1-15, June.
  18. Tsur, Yacov & Zemel, Amos, 1996. "Accounting for global warming risks: Resource management under event uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1289-1305.
  19. Kemp, Murray C & Long, Ngo Van, 1980. "On Two Folk Theorems Concerning the Extraction of Exhaustible Resources," Econometrica, Econometric Society, vol. 48(3), pages 663-73, April.
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Citations

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Cited by:
  1. Murray C. Kemp & Ngo Van Long, 2009. "Extracting Resource Deposits of Unknown Size: Optimal Order," German Economic Review, Verein für Socialpolitik, vol. 10, pages 401-421, November.
  2. R. Quentin Grafton & Tom Kompas & Ngo Van Long, 2010. "Do Biofuel Subsidies Reduce Greenhouse Gas Emissions?," International and Development Economics Working Papers idec10-01, International and Development Economics.
  3. Frederick Van der Ploeg, 2010. "Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility," CESifo Working Paper Series 3038, CESifo Group Munich.
  4. R. Quentin Grafton & Tom Kompas & Ngo Van Long, 2010. "Biofuels Subsidies and the Green Paradox," CESifo Working Paper Series 2960, CESifo Group Munich.

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