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The Finding Cost of Natural Gas: Technological Change versus Resource Depletion

  • John T. Cuddington

    (Georgetown University)

  • Diana L. Moss

    (Office of Economic Policy, Federal Energy Regulatory Commission)

This study provides an empirical analysis of the extent to which ongoing technological change has offset the effect of ongoing depletion on the cost of finding additional reserves of natural gas. In the process, we develop a new index of technological change for exploration and development (E&D) activities in the natural gas industry by identifying new technologies by year of diffusion using a detailed analysis of technical trade publications. Counting the number of technological diffusions in each year, one gets an indication of the rate of technological advance over time. The cumulative total is an indicator of the level of technology. Next, we motivate the inclusion of our measure of the current state of technology in the production function and the implied cost function for finding natural gas. This is done using alternative indices of capital obtained from the quality ladders and varieties models in the recent "endogenous growth" literature. Our estimated cost equations isolate the separate effects of depletion and technological improvement on the finding cost for natural gas. Counter factual simulations based on the cost functions suggest that technological change played a major role in allaying what would otherwise have been a sharp rise in production costs as additional reserves became harder and more expensive to find. Hence, our analysis provides empirical evidence of the common claim in the resource literature that technology has largely counteracted increasing resource scarcity in at least one nonrenewable resource sector, the natural gas industry.

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Paper provided by EconWPA in its series Microeconomics with number 9610004.

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Date of creation: 24 Oct 1996
Date of revision: 30 Jul 1998
Handle: RePEc:wpa:wuwpmi:9610004
Note: Type of Document - WordPerfect; prepared on IBM PC ; to print on HP; pages: ; figures: included on jctables.wk4 and fig1_jc.pre. Economics Department, Georgetown University Office of Economic Policy, Federal Energy Regulatory Commission. The views and findings expressed in this paper are those of the authors alone and should not be attributed to the FERC.
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  1. Heal, Geoffrey M., 1993. "The optimal use of exhaustible resources," Handbook of Natural Resource and Energy Economics, in: A. V. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 18, pages 855-880 Elsevier.
  2. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
  3. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  4. Devarajan, Shantayanan & Fisher, Anthony C, 1981. "Hotelling's "Economics of Exhaustible Resources": Fifty Years Later," Journal of Economic Literature, American Economic Association, vol. 19(1), pages 65-73, March.
  5. Livernois, John R & Ryan, David L, 1989. "Testing for Non-jointness in Oil and Gas Exploration: A Variable Profit Function Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 479-504, May.
  6. 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.
  7. Devarajan, Shantayanan & Fisher, Anthony C, 1982. "Exploration and Scarcity," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1279-90, December.
  8. Kamien, Morton I & Schwartz, Nancy L, 1978. "Optimal Exhaustible Resource Depletion with Endogenous Technical Change," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 179-96, February.
  9. Walls, Margaret A., 1992. "Modeling and forecasting the supply of oil and gas : A survey of existing approaches," Resources and Energy, Elsevier, vol. 14(3), pages 287-309, September.
  10. Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June.
  11. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
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