Non-conflicting Resource Pricing Policies in an Interdependent World

Abstract

Our concern in this paper is to analyze the optimal long-run policies of oil-exporting countries. These might be described briefly as the policies which best meet their objectives, subject to the various limitations imposed on them by the realities of world economic forces.The objectives of the oil-exporting countries have been conveniently summarized in earlier discussions in OPEC Seminars (see Sepahban, 1982) under the following headings:1. The conservation of hydrocarbon resources2. Accelerated economic and social development of their domestic economies, and in particular rapid capital formation.3. Improved terms of trade with industrial countries.4. Maintenance of reasonable rates of economic growth for the international community, including industrial countries.It was shown in the above-mentioned paper that the requirements of the first of these four objectives, namely the conservation of OPEC's hydrocarbon resources, can be met by the application of Hotelling's principle of the economics of exhaustible resources, whereas the requirement of the other three objectives can be met by the use of a compact general equilibrium trade model developed at UNITAR (Chichilnisky, 1981). It was therefore recommended that attempts should be made to find the proper way to combine the main features of these two approaches into a single tool of analysis for the development of a logical strategy for the pricing and production of exhaustible resources, which would meet the requirements of all the above four objectives simultaneously.The present paper achieves this goal by deriving the industrial countries' demand for OPEC oil as a function of price, using the general equilibrium trade model (section two), and applying this demand function to the dynamic Hotelling model (section three); thus introducing the notion of gradually increasing the scarcity of oil into the analysis. We use the derived demand function to compute the marginal revenues as a function of price, and then apply Hotelling's principle, which requires that the marginal revenue increases at a rate equal to the real rate of interest, as a condition for the maximization of the discounted sum of OPEC's revenue.The results show that the optimal path may exhibit upward jumps in OPEC prices, especially in periods which are preceded by a period of slowly increasing or decreasing prices. It therefore bears some resemblance to the actual path of oil prices, which has seen oil price jumps following periods of relatively constant prices.These new findings, together with the prospect of finding non-conflicting solutions, a feature of UNITAR's general equilibrium model, point to a useful direction of future research.