The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty
AbstractUncertainties as to future supply costs of nonrenewable natural resources, such as oil and gas, raise the issue of the choice of supply sources. In a perfectly deterministic world, an efficient use of multiple sources of supply requires that any given market exhausts the supply it can draw from a low cost source before moving on to a higher cost one; supply sources should be exploited in strict sequence of increasing marginal cost, with a high cost source being left untouched as long as a less costly source is available. We find that this may not be the efficient thing to do in a stochastic world. We show that there exist conditions under which it can be efficient to use a risky supply source in order to conserve a cheaper non risky source. The benefit of doing this comes from the fact that it leaves open the possibility of using it instead of the risky source in the event the latter’s future cost conditions suddenly deteriorate. There are also conditions under which it will be efficient to use a more costly non risky source while a less costly risky source is still available. The reason is that this conserves the less costly risky source in order to use it in the event of a possible future drop in its cost.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2008-04.
Length: 28 pages
Date of creation: 2008
Date of revision:
Contact details of provider:
Postal: CP 6128, Succ. Centre-Ville, Montréal, Québec, H3C 3J7
Phone: (514) 343-6540
Fax: (514) 343-5831
Web page: http://www.sceco.umontreal.ca
More information through EDIRC
Security of suly ; Uncertainty; Nonrenewable resources ; Order of use;
Other versions of this item:
- Gérard Gaudet & Pierre Lasserre, 2011. "The Efficient Use Of Multiple Sources Of A Nonrenewable Resource Under Supply Cost Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 245-258, 02.
- GAUDET, Gérard & LASSERRE, Pierre, 2008. "The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty," Cahiers de recherche 04-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Gérard Gaudet & Pierre Lasserre, 2008. "The Efficient Use of Multiple Sources of a Nonrenewable Resource Under Supply Cost Uncertainty," CIRANO Working Papers 2008s-08, CIRANO.
- Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D90 - Microeconomics - - Intertemporal Choice - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Gerard Gaudet & Michel Moreaux & Stephen W. Salant, 2001. "Intertemporal Depletion of Resource Sites by Spatially Distributed Users," American Economic Review, American Economic Association, vol. 91(4), pages 1149-1159, September.
- Long, Ngo Van, 1975. "Resource extraction under the uncertainty about possible nationalization," Journal of Economic Theory, Elsevier, vol. 10(1), pages 42-53, February.
- Amigues, J-P & Favard, P., Gaudet, G. & Moreaux, M, 1996.
"On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute is Limited,"
Cahiers de recherche
9628, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Amigues, Jean-Pierre & Favard, Pascal & Gaudet, Gerard & Moreaux, Michel, 1998. "On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute Is Limited," Journal of Economic Theory, Elsevier, vol. 80(1), pages 153-170, May.
- Amigues, J-P & Favard, P, Gaudet, G & Moreaux, M, 1996. "On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute is Limited," Cahiers de recherche 9628, Universite de Montreal, Departement de sciences economiques.
- 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.
- Devarajan, Shantayanan & Weiner, Robert J., 1989. "Dynamic policy coordination: Stockpiling for energy security," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 9-22, January.
- Bergstrom, Clas & Loury, Glenn C & Persson, Mats, 1985. "Embargo Threats and the Management of Emergency Reserves," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 26-42, February.
- Hillman, Arye L & Long, Ngo Van, 1983. "Pricing and Depletion of an Exhaustible Resource When There Is Anticipation of Trade Disruption," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 215-33, May.
- 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.
- Benchekroun, Hassan & Halsema, Alex & Withagen, Cees, 2010. "When additional resource stocks reduce welfare," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 109-114, January.
- Julien Daubanes & Pierre Lasserre, 2012. "Non-Renewable Resource Supply: Substitution Effect, Compensation Effect, and All That," CIRANO Working Papers 2012s-28, CIRANO.
- paunic, alida, 2009. "Some additional thoughts about renewables in Canada," MPRA Paper 13163, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharon BREWER).
If references are entirely missing, you can add them using this form.