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Adelman's Rule and the Petroleum Firm

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  • Robert D. Cairns and Graham A. Davis

Abstract

Observing that net prices do not rise as predicted and that resource stocks are not fixed, Adelman questions Hotelling's model of an exhaustible resource. He cites a rule of thumb for valuing oil reserves which is about onehalf that given by the Hotelling valuation principle. We apply an optimization model to a stylized characterization of an oil reservoir. Adelman's valuation rule is confirmed. An r-percent rule emerges as well, but it is not Hotelling's rule. We end the paper with our interpretation of Hotelling's rule. We also consider the role of investment in augmenting the quantities of a resource currently extracted.

Suggested Citation

  • Robert D. Cairns and Graham A. Davis, 2001. "Adelman's Rule and the Petroleum Firm," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 31-54.
  • Handle: RePEc:aen:journl:2001v22-03-a02
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    Citations

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    Cited by:

    1. Leach, Andrew & Mason, Charles F. & Veld, Klaas van ‘t, 2011. "Co-optimization of enhanced oil recovery and carbon sequestration," Resource and Energy Economics, Elsevier, vol. 33(4), pages 893-912.
    2. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    3. John Hartwick, 2012. "Higher Quality Exhaustible Resource Deposits Receiving Higher Or Lower Resource Rents In A Simple Spatial Framework," Working Paper 1306, Economics Department, Queen's University.
    4. Okullo, Samuel & Reynes, F. & Hofkes, M., 2016. "Biofuel Mandating and the Green Paradox," Discussion Paper 2016-024, Tilburg University, Center for Economic Research.
    5. Jakobsson, Kristofer & Bentley, Roger & Söderbergh, Bengt & Aleklett, Kjell, 2012. "The end of cheap oil: Bottom-up economic and geologic modeling of aggregate oil production curves," Energy Policy, Elsevier, vol. 41(C), pages 860-870.
    6. repec:elg:eechap:14605_1 is not listed on IDEAS
    7. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.
    8. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2015. "Modeling peak oil and the geological constraints on oil production," Resource and Energy Economics, Elsevier, vol. 40(C), pages 36-56.
    9. Yarram, Subba Reddy & Rice, John, 2017. "Executive compensation among Australian mining and non-mining firms: Risk taking, long and short-term incentives," Economic Modelling, Elsevier, vol. 64(C), pages 211-220.
    10. Roberts, Gavin & Barbier, Edward & van 't Veld, Klaas, 2019. "Global emissions from crude oil: The effect of oil-deposit heterogeneity," Energy Policy, Elsevier, vol. 132(C), pages 654-664.
    11. Smith, James L., 2014. "A parsimonious model of tax avoidance and distortions in petroleum exploration and development," Energy Economics, Elsevier, vol. 43(C), pages 140-157.
    12. Cairns, Robert D., 2004. "Principles of green accounting for renewable and nonrenewable energy resources," Energy Policy, Elsevier, vol. 32(2), pages 261-267, January.
    13. Groeneveld, Benjamin & Topal, Erkan & Leenders, Bob, 2019. "Examining system configuration in an open pit mine design," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    14. Robert D. Cairns and Graham A. Davis, 2015. "Mineral Depletion and the Rules of Resource Dynamics," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    15. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
    16. Hart, Rob, 2016. "Non-renewable resources in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 1-20.
    17. John Hartwick, 2011. "Higher Quality Exhaustible Resource Deposits Receiving Higher Or Lower Resource Rents In A Simple Spatial Framework," Working Paper 1281, Economics Department, Queen's University.
    18. Okullo, Samuel J. & Reynès, Frédéric, 2016. "Imperfect cartelization in OPEC," Energy Economics, Elsevier, vol. 60(C), pages 333-344.
    19. Niko Jaakkola, 2013. "Monopolistic Sequestration of European Carbon Emissions," OxCarre Working Papers 098, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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    JEL classification:

    • F0 - International Economics - - General

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