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Equilibrium Exhaustible Resource Price Dynamics

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  • Murray Carlson
  • Zeigham Khokher
  • Sheridan Titman

Abstract

We develop equilibrium models of an exhaustible resource market where both prices and extraction choices are determined endogenously. Our analysis highlights a role for adjustment costs in generating price dynamics that are consistent with observed oil and gas forward prices as well as with the two-factor prices processes that were calibrated in Schwartz and Smith (2000). Stochastic volatility aries in our two-factor model as a natural consequence of production for oil and natural gas prices. Differences between the endogenous price processes considered in earlier papers can generate significant differences in both financial and real option values.

Suggested Citation

  • Murray Carlson & Zeigham Khokher & Sheridan Titman, 2006. "Equilibrium Exhaustible Resource Price Dynamics," NBER Working Papers 12000, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12000
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    More about this item

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • G1 - Financial Economics - - General Financial Markets

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