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Comment on: “Optimal dynamic production from a large oil field in Saudi Arabia”

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  • Islam Rizvanoghlu

    (Zirve University, Kizilhisar Campus)

Abstract

This paper extends the study by Gao et al. (Empir Econ 37:153–184, 2009), which models the profit-maximizing dynamic oil production from a large oil field in Saudi Arabia by using an engineering model of oil extraction. Although it gives an important insight about the dynamics of oil production by examining and comparing different scenarios for exogenous variables, it assumes perfect knowledge and foresight about the future. However, the production decision might not be based on different scenarios, but rather on different expectations about the future. Therefore, we propose to extend the model by incorporating uncertainty arising from a random arrival date of a new backstop technology that will enable the production of a perfect substitute for oil. We find that the optimal production path has a different dynamic under this new specification that may explain the less aggressive extraction behavior of the producer before 2000, which was concluded to be economically irrational by Gao et al. (2009).

Suggested Citation

  • Islam Rizvanoghlu, 2016. "Comment on: “Optimal dynamic production from a large oil field in Saudi Arabia”," Empirical Economics, Springer, vol. 51(3), pages 1281-1288, November.
    • Handle: RePEc:spr:empeco:v:51:y:2016:i:3:d:10.1007_s00181-015-1032-x
    DOI: 10.1007/s00181-015-1032-x
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    References listed on IDEAS

    as
    1. Weiyu Gao & Peter Hartley & Robin Sickles, 2009. "Optimal dynamic production from a large oil field in Saudi Arabia," Empirical Economics, Springer, vol. 37(1), pages 153-184, September.
    2. Hartley, Peter R., 1996. "Value function approximation in the presence of uncertainty and inequality constraints an application to the demand for credit cards," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 63-92.
    3. Nemet, Gregory F., 2006. "Beyond the learning curve: factors influencing cost reductions in photovoltaics," Energy Policy, Elsevier, vol. 34(17), pages 3218-3232, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Optimal oil production; Dynamic programming; Value function approximation; Backstop technology;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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