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Depletion and development: natural resource supply with endogenous field opening

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  • Tony Venables

Abstract

This paper develops a model in which supply of a non-renewable resource can adjust through two margins: the rate of depletion and the rate of field opening.� Faster depletion of existing fields means that less of the resource can ultimately be extracted, and optimal depletion of open fields follows a (modified) Hotelling rule.� Opening a new field involves sinking a capital cost, and the timing of field opening is chosen to maximize the present value of the field.� Output dynamics depend on both depletion and field opening, and supply responses to price changes are studied.� In contrast to Hotelling, the long run equilibrium rate of growth of prices is independent of the rate of intereset, depending instead on characteristics of demand and geologically determined supply.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 554.

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Date of creation: 01 Jun 2011
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Handle: RePEc:oxf:wpaper:554

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Keywords: Natural resource; Depletion; Hotelling; Fossil fuel; Carbon tax;

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  1. Sinn, Hans-Werner, 2008. "Public policies against global warming: A supply side approach," Munich Reprints in Economics 19638, University of Munich, Department of Economics.
  2. John Hartwick & Murray Kemp & Ngo van Long, 1980. "Set-up Costs and Theory of Exhaustible Resources," Working Papers 412, Queen's University, Department of Economics.
  3. Chakravorty, Ujjayant & Moreaux, Michel & Tidball, Mabel, 2006. "Ordering the Extraction of Polluting Nonrenewable Resources," IDEI Working Papers 415, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Lewis, Tracy R, 1982. "Sufficient Conditions for Extracting Least Cost Resource First," Econometrica, Econometric Society, vol. 50(4), pages 1081-83, July.
  5. Amigues, J-P & Favard, P.author-name: 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.
  6. Hans-Werner Sinn, 2007. "Public Policies against Global Warming," NBER Working Papers 13454, National Bureau of Economic Research, Inc.
  7. Chermak, Janie M. & Patrick, Robert H., 2002. "Comparing tests of the theory of exhaustible resources," Resource and Energy Economics, Elsevier, vol. 24(4), pages 301-325, November.
  8. Holland, Stephen P., 2003. "Set-up costs and the existence of competitive equilibrium when extraction capacity is limited," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 539-556, November.
  9. Fischer, Carolyn & Laxminarayan, Ramanan, 2005. "Sequential development and exploitation of an exhaustible resource: do monopoly rights promote conservation?," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 500-515, May.
  10. Livernois, John R & Uhler, Russell S, 1987. "Extraction Costs and the Economics of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 195-203, February.
  11. Nystad, Arild N., 1987. "Rate sensitivity and the optimal choice of production capacity of petroleum reservoirs," Energy Economics, Elsevier, vol. 9(1), pages 37-45, January.
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