Exhaustible Resource Extraction Research Articles

Extract or conserve? The Hartwick-rule and sustainable environmental governance

The legal safeguards for sustainable environmental governance are often inadequate, inefficient, and amenable to political maneuverings. Australia recently approved the Carmichael coal mine, rail, and expansion of the Abbot Port projects. These projects, along with many others in the region, have dire consequences for the groundwater system (Currell et al., 2017) [5], the Great Barrier Reef (Kroon et al., 2016; Grech et al., 2016) [6,7], and climate change (Taylor and Meinshausen, 2014) [8]. Here we show that incorporating the Hartwick-rule in economic analysis renders many of these projects unviable with or without the opportunity and externality costs. The Hartwick-rule dictates that exhaustible resource extraction can ensure weak sustainability if resource rents can be invested in such a way that the produced capital outweighs the consumed natural capital (Hartwick, 1977) [9]. We put forward two main arguments; one, resource rents belong to the society and many projects are only viable when these rents are invested with a certain growth rate; second, economic analysis shall incorporate the Hartwick-rule and shall be applied prior to recourse to the legal safeguards. Our analysis can be applied to any non-renewable natural resource extraction decision making.

Lobbying over exhaustible-resource extraction

In a dynamic model of natural-resource extraction, we characterize the extraction path that is chosen by a government which is lobbied by natural-resource suppliers. The lobby group pays the government in exchange for a favorable policy. We show how the development of payments relates to the development of a conflict of interest between profit maximization and welfare maximization. The agreed extraction reflects the resource owners preference for supply restrictions that keep up the price and the government’s preference for avoiding flow-pollution damages. Due to stock-pollution damages, the government prefers a lower level of total extraction than the lobby group. Resource extraction decreases monotonically. Lobby payments do not necessarily do so, but they decrease in the long run.

On optimal extraction under asymmetric information over reclamation costs

Polluting exhaustible resource extraction ends with costly reclamation and producers have better information about future reclamation costs than the regulator. This paper analyzes optimal contract between the regulator and the mining firm in a two-stage model, in which extraction and pollution generation is followed by reclamation with asymmetric information over reclamation costs. The contract consists of a pollution tax and a mechanism used for cost information revelation, and it extracts all the profit from the highest-cost type, leaves profits for the more efficient types and dictates a reclamation effort that is lower than the complete information effort. It is further shown that the optimal pollution tax under asymmetric information can be lower or higher than the tax under complete information. In addition, the exclusion of the most expensive types is analyzed. The results can help to design policies that improve the existing ones by saving public funds, by improving the state of the environment and by excluding those mining operations that do not produce (net) benefits for the society.

Malthus in the light of climate change

Abstract To reconsider the Malthusian predictions of natural limits to economic development, the paper develops a multi-sector growth model with exhaustible resource extraction, investments in physical and knowledge capital, climate change, and endogenous fertility. Economic growth is driven by endogenous innovations which increase in the availability and productivity of research labour. Poor substitution of natural resources triggers sectoral change. Climate change is the result of polluting resource use which is, like consumption and investments, based on the intertemporal optimization of the households. Highlighting the importance of bounded resource supply and of rational extraction decisions I show that climate change is independent of population growth in steady state and there is no causal relationship between climate and population during transition to steady state. The consumption per capita growth rate rises in the innovation rate and the output elasticities of labour and capital in the different sectors. Unlike climate policy, population policy is not warranted; it may be counterproductive because labour is crucial for the research sector.

Malthus in the Light of Climate Change

To reconsider the Malthusian predictions of natural limits to economic development, the paper develops a multi-sector growth model with exhaustible resource extraction, investments in physical and knowledge capital, climate change, and endogenous fertility. Economic growth is driven by endogenous innovations which increase in the availability and productivity of research labour. Poor substitution of natural resources triggers sectoral change. Climate change is the result of polluting resource use which is, like consumption and investments, based on the intertemporal optimization of the households. Highlighting the importance of bounded resource supply and of rational extraction decisions I show that climate change is independent of population growth in steady state and there is no causal relationship between climate and population during transition to steady state. The consumption per capita growth rate rises in the innovation rate and the output elasticities of labour and capital in the different sectors. Unlike climate policy, population policy is not warranted; it may be counterproductive because labour is crucial for the research sector.

The Qualitative Properties of Symmetric Open‐Loop Nash Equilibria in the State‐Control Dynamic System in Differential Games

AbstractThe local stability, steady state comparative statics, and local comparative dynamics of symmetric open‐loop Nash equilibria in the state‐control dynamic system for a seemingly ubiquitous class of discounted infinite horizon differential games are investigated. It is shown that most of the useful qualitative results occur because the same small number of assumptions is being made about the mathematical structure of the integrand and/or state equations. Applications of the results to exhaustible resource extraction and capital accumulation differential games are provided.

Political economy of dynamic resource wars

The political economy of exhaustible resource extraction is analysed in three contexts. First, if an incumbent faces a threat of being removed once and for all by a rival faction, extraction becomes more voracious if the factions do not share rents equally. Second, perennial political conflict cycles are more inefficient if constitutional cohesiveness or the partisan in-office bias is large and political instability is high. Third, resource wars are more intense if constitutional cohesiveness is weak, the incumbent has a partisan in-office bias, reserves of resources are high, the wage is low, governments can be less frequently removed from office, and fighting technology has less decreasing returns to scale. Resource depletion in such wars is more rapacious if there is more government instability, the political system is less cohesive, and the partisan in-office bias is smaller.

Piecewise closed-loop equilibria in differential games with regime switching strategies

We propose a new methodology exploring piecewise closed-loop equilibrium strategies in differential games with regime switching actions. We develop a general game with two players. Players choose an action that influences the evolution of a state variable, and decide on the switching time from one regime to another. Compared to the optimal control problem with regime switching, necessary optimality conditions are modified for the first player to switch. When choosing her optimal switching strategy, this player considers the impact of her choice on the other player’s actions and consequently on her own payoffs. In order to determine the equilibrium timing of regime changes, we derive conditions that help eliminate candidate equilibrium strategies that do not survive deviations in switching strategies. We then apply this new methodology to an exhaustible resource extraction game.

Reserve Lifetime and Depletion in Exhaustible Resource Extraction Under Uncertainty

This paper studies the implications for reserve lifetime and related quantities in a continuous time model of resource extraction under uncertainty. Both the resource price and the extracted amount ...

Markov Perfect Equilibria in Differential Games with Regime Switching Strategies

We propose a new methodology exploring Markov perfect equilibrium strategies in differential games with regime switching. Specifically, we develop a general game with two players having two kinds of strategies. Players choose an action that influences the evolution of a state variable, and decide on the switching time from one regime to another. Compared to the optimal control problem with regime switching, necessary optimality conditions are modified for the first-mover. When choosing her optimal switching strategy, this player considers the impact of her choice on the other player’s actions and payoffs. In order to determine the equilibrium timing of regime changes, the notion of wrong timing is introduced and necessary conditions for a particular timing to be wrong are derived. We then apply this new methodology to an exhaustible resource extraction game. Sufficient conditions for the existence of an interior solution are compared to those characterizing a wrong timing. The impact of feedback strategies for the equilibrium adoption time depends on the balance between two conflicting effects: the first mover incurs an indirect cost due to the future switching of her rival (incentive to delay the switch). But she is able to affect the other player’s switching decision (incentive to switch more rapidly). In a particular case without direct switching cost, the interplay between the two ensures that the first-mover adopts the new technology in finite time. Interestingly, this result differs from what is obtained in a non-game theoretic framework, i.e. immediate adoption.

Taxes and the Extraction of Exhaustible Resources: Evidence from California Oil Production

Rapid oil price increases frequently bring calls for special oil industry taxes. This paper uses new well-level production data and price variation induced by federal oil taxes and price controls to estimate how taxes affect production. Theory suggests temporary taxes create strong incentives for retiming productioneven well shutting. Empirical estimates suggest little shut-in in response to taxes, but substantial production retiming with an estimated elasticity between 0.208 and 0.261. The estimates are used to calibrate a simple model of the efficiency cost of tax-induced distortions, implying that a 15% tax reduces social efficiency by between 3% and 25% of the revenue raised.

Cake eating, exhaustible resource extraction, life-cycle saving, and non-atomic games: Existence theorems for a class of optimal allocation problems

This paper investigates the problem concerning the existence of a solution to a diverse class of optimal allocation problems which include models of cake eating, exhaustible resource extraction, life-cycle saving, and non-atomic games. A new formulation that encompasses all these diverse models is provided. Examples of these models for which a solution does not exist and the causes of the non-existence are studied. Two theorems are provided to tackle the existence problem under different conditions. Several analytical examples with a closed-form solution are offered to illustrate the usefulness of the existence theorems.

Capital Accumulation and Resource Depletion: A Hartwick Rule Counterfactual

How rich would resource-abundant countries be if they had actually followed the Hartwick Rule (invest resource rents in other assets) over the past 30 years? The authors use time series data on investments and rents on exhaustible resource extraction for 70 countries to answer this question. The results are striking: Gabon, Trinidad and Tobago, and Venezuela would all be as wealthy as the Republic of Korea, while Nigeria would be five times as well off as it is currently. The authors also derive a more general rule for sustainability-maintain positive constant genuine investment-and use this to draw further empirical results.

Depletion of fossil fuels and the impacts of global warming

This paper combines the theory of optimal extraction of exhaustible resources with the theory of greenhouse externalities, to analyze problems of global warming when the supply side is considered. The optimal carbon tax will initially rise but eventually fall when the externality is positively related to the stock of carbon in the atmosphere. It is shown that the tax will start falling before the stock of carbon in the atmosphere reaches its maximum. If there exists a non-polluting backstop technology, it will be optimal to extract and consume fossil fuels even when the price of fossil fuels is equal to the price of the backstop. The total extraction is the same as when the externality is ignored, but in the presence of the greenhouse effect, it will be optimal to slow the extraction and spread it over a longer period. If, on the other hand, the greenhouse externality depends on the rate of change in the atmospheric stock of carbon, the evolution of the optimal carbon tax is more complex. It can even be optimal to subsidize carbon emissions to avoid future rapid changes in the stock of carbon, and therefore future damages.

A Well-Based Cost Function and the Economics of Exhaustible Resources: The Case of Natural Gas

A cost function for natural gas production is estimated, using a pool of data from 29 wells. Statistically exact tests are performed for parameter stability across locations, formations, wells, and producing firms. Costs are determined to be inversely related to remaining recoverable reserves, and marginal costs of production are decreasing in all cases. Theoretical implications of these cost characteristics on optimal exhaustible resource extraction are analyzed. Although marginal cost is decreasing, production effects on the resource stock imply that an interior production path may be optimal. Conditions under which production optimally occurs at the capacity bound are delineated, and optimal interior production paths are characterized.

Impact of taxation on extraction of exhaustible resources

Impact of taxation on extraction of exhaustible resources

Do oil producers act as ‘Oil’igopolists?

In this paper, I analyze an oligopoly model of exhaustible resource extraction and develop predictions about relative extraction patterns of different producers. Using the ‘oi’'igopoly model of Loury ( Internat. Econom. Rev. 27, 285–301 (1986)), one can show that producers with large stocks produce a larger amount, but a smaller percentage, of their stocks than producers with small stocks. I extend Loury's model to cases where extraction costs differ among producers and where costs are a function of cumulative extraction. An increase in extraction costs for a producer causes it to produce less relative to its rivals. When extraction costs rise with cumulative extraction, producers with large reserves tend to have lower extraction costs and a smaller ratio of cumulative production to initial reserves than producers with small reserves. I test the predictions of the model using oil industry data and find that the empirical results are consistent with the predictions of ‘oil’igopoly theory. Producers with larger reserves extract a smaller share of their reserves and have lower production costs than producers with smaller reserves. This pattern holds for 73 countries with oil reserves during the time period 1970–1989, and for approximately 400 U.S. oil companies in 1983 and 1984. The observed pattern of production for both OPEC and non-OPEC producers is consistent with ‘oil’igopoly theory. OPEC producers do not appear to restrain production given their level of reserves relative to non-OPEC producers. Thus, viewing the oil market as containing one dominant firm (OPEC) with a competitive fringe may be misleading. Further, the pattern of extraction observed in oil markets is inconsistent with the pattern predicted by competitive theory.

Resource extraction of imperfect substitutes

The recent literature about exhaustible resource extraction emphasized the analysis of perfect substitutes (‘backstop’), but overlooked the important case of imperfect substitutes. This paper introduces imperfect substitutes and investigates whether properties, which are robust in one commodity case, carry over to the case of limited substitution. In particular, the proposition of strict sequential exploitation of reservoirs of a certain resource from the cheapest to the more costly grades and the validity of declining extraction are investigated for the more general case of imperfect substitutes. It will be shown that these properties are not robust against variations in the assumption of the degree of competition of the resource types contained in the difference pools.

The extraction of exhaustible resources under demand uncertainty

The paper analyses the effects of demand uncertainty on the extraction of an exhaustible resource under perfect competition and monopoly with either risk-neutral or risk-averse resource owners. We develop a model which is sufficiently general to encompass previous studies as special cases, and still simple enough to allow an easy interpretation of exactly which factors influence a market for an exhaustible resource under demand uncertainty. The paper provides a reconciliation and generalization of results previously reported in the literature.

On the Intergenerational Allocation of Natural Resources

It is known (Hartwick and others) that, under standard assumptions, a society that invests in reproducible capital the competitive rents on its current extraction of exhaustible resources, will enjoy a consumption stream constant in time. It is shown here that this result can be interpreted as saying that an appropriately defined stock of capital -including the initial endowment of resources - is being maintained intact, and that consumption can be interpreted as the interest on that patrimony. This seems like a useful rule of thumb for policy.