Energy Development: A Resource Allocation Problem

Abstract

Fore, James G., Member AIME This paper was prepared for the 48th Annual Fall Meeting of the Society of Petroleum Engineers of AIME, to be held in Las Vegas, Nev., Sept. 30-Oct. 3, 1973. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines. Abstract The actions of both the producer and consumer in the energy market have been very rational as each tries to maximize his position. The producer is motivated by profits while the consumer is seeking to maximize his total level of utility. The problems that are occurring in the energy market can be traced in most cases to one of market restrictions or failure of the market to fully reflect costs due to externalities. It is these restrictions and/or externalities that have led to our present energy crisis and not any overt acts by present energy crisis and not any overt acts by the producers or consumers. Introduction Most people acknowledge that as the demand for resources increases and these resources become scarcer the price would move higher. The effect of this increase in price would be to reduce demand for that price would be to reduce demand for that resource by causing some individuals to substitute more abundant resources for scarcer ones, or it would increase the supply of that resource by development and application of new technologies to permit the use of poorer quality resources. This in turn would lead to an optimal use of resources. The price referred to here is the market price, the market price being established by price, the market price being established by bringing together the demand curve of consumers and the supply curve of producers, Figure 1. The purpose of the price is to help our economic system achieve efficiency. It does this in two ways. The first concerns the allocation of the currently available goods and services. The second concerns the production of goods and services, that is, production of goods and services, that is, what quantities of what goods and services should be produced. This price is completely impartial in the allocation of goods to consumers as well as to who shall produce the goods. So one would expect to hear complaints about the price being too high from some consumers and being too low from some producers. After all, allocation is the purpose of the market price. price.