Abstract
This paper introduces endogenous technological change in a Hotelling-Herfindahl model of natural resource use to study the recent developments in the U.S. natural gas industry. We consider optimal forward-looking technology investments, and study implications for the order of extraction of conventional and shale gas, and a backstop technology, and characterize the development of gas prices. We find that technology investments increase during the extraction of conventional gas. Once production shifts towards shale gas, investments decline. Consistent with current trends, our theory explains how gas prices can follow a U-shaped path. The calibrated model suggests that U.S. shale gas production continues to grow and prices continue to decrease until 2050. We analytically and numerically show that the introduction of a carbon tax would reduce technology investments, and thus could drastically change the temporal patterns of U.S. shale gas extraction. The forward-looking behaviour of firms is crucial for such an effect, which does not occur in models that treat the improvement in extraction technology as an unanticipated shock to the industry.
Highlights
Resource booms have become a reoccurring phenomenon across the world, including the natural gas and oil sector (Carter et al, 2011; Jacobsen and Parker, 2016)
We find that a variant of the Generalized Herfindahl Principle holds when taking endogenous technological change into account, but that the shadow values of both resources depend on the patterns of technological change
We analytically show that a carbon tax reduces optimal investment into shale gas extraction technology, and that the time-delaying effect of a carbon tax is even more pronounced when taking into account that technological change is endogeneous
Summary
Resource booms have become a reoccurring phenomenon across the world, including the natural gas and oil sector (Carter et al, 2011; Jacobsen and Parker, 2016). Pindyck (1978) develops a model in which he allows for the exploration of new reserves in the presence of stock dependent extraction costs He shows that due to exploration, the price of a resource can follow a U-shaped path. We further find that the introduction of a carbon tax could have had a strong postponing effect on the U.S shale gas boom This time-delaying effect critically depends on the forward-looking behaviour of producers, and does not occur in models that threat the improvement in shale extraction technology as an exogenous and unanticipated shock to the industry. For policy analysis it makes a big difference whether technical progress is exogenous or endogenous.
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