Theory Of Exhaustible Resources Research Articles

The US oil spot market: a deterministic chaotic process or a stochastic process?

This paper studies the US crude oil (CO) market and its structural changes. The theory of exhaustible resources and the fundamentals of crude oil supply and demand form the theoretic foundation of our research. The role of a set of recent drivers of oil prices in creating short-term shocks is then investigated. Such shocks cause deviations in the US CO market from the efficient-market hypothesis. In our empirical investigations, we implemented the modified rescaled range analysis, the Brock-Dechert-Scheinkman test and the maximum Lyapunov exponent test. The sample period ranges from 1986 to 2008 and two subperiods are considered: the energy crisis of 1990-91 and the financial meltdown in 2007-8. The findings supplement prior works on chaos theory and show temporary low-dimensional chaotic processes in the US CO market during periods of shocks. However, there is no evidence of persistent chaotic dynamics in the US CO market. Although the results do not indicate any structural changes in the US CO market, we find clear evidence of cyclical changes. In short, despite short-term shocks creating biased random-walk behavior in CO prices in the short term, the behavior of the US CO market is consistent with supply and demand fundamentals.

The Theory of Exhaustible Resources: What are the Econometric Methods Testing?

Empirical tests of the theory of exhaustible resources have come to conflicting conclusions concerning the validity of the theory to exhaustible resources to explain owners’ production decisions. This paper develops the theoretical framework, alternative measures of the unobservable in situ resource price, and evaluates the potential impacts of processing of the resource on the test results, as well as those of incomplete data and/or information. We evaluate the consistency of the two commonly used test methodologies and the impacts on results of alternative measures of the unobservable in situ resource price. We show how, all else equal, the tests methodologies diverge; as a result, the possibility of discrepant results should not be a surprise. In regards to the impacts of processing, data and information, we find the potential for inaccuracy in the estimate of the in situ resource price, which may result in biased test results.

Irreconcilable Differences in Tests of Hotelling’s Theory of Exhaustible Resources

Empirical tests of the theory of exhaustible resources have provided mixed results regarding empirical validity of the theory. This paper considers differences in the primary testing methodologies and alternative measures of the in situ resource price. We demonstrate that in situ price measures common in the literature are theoretically equivalent for the vertically integrated firm. We also show that empirical shadow price test methodologies imply the same restricted econometric model, while the unrestricted models diverge. We find that the Halvorsen and Smith (1991) test methodology is relatively efficient, and, using data on natural gas wells, reject the unrestricted transition equation of traditional methodology. We conclude that discrepant empirical test results may be an artifact of the econometric testing methodologies rather than a reflection on the validity of the theory.

Strong time-consistency in the cartel-versus-fringe model

Due to developments on the oil market in the 1970s, the theory of exhaustible resources was extended with the cartel-versus-fringe model to characterize markets with one big coherent cartel and a large number of small suppliers called the fringe. Because cartel and fringe are leader and follower, the von Stackelberg solution concept is appropriate for the supply side of this market. The solution for the cartel-versus-fringe model, presented in the previous literature, proved to be time-inconsistent for a large plausible range of values for extraction costs and initial reserves. This paper provides a (strongly) time-consistent solution for the cartel-versus-fringe model.

The Time Path of Scarcity Rent in the Theory of Exhaustible Resources

Journal Article The Time Path of Scarcity Rent in the Theory of Exhaustible Resources Get access Y. H. Farzin Y. H. Farzin Search for other works by this author on: Oxford Academic Google Scholar The Economic Journal, Volume 102, Issue 413, 1 July 1992, Pages 813–830, https://doi.org/10.2307/2234579 Published: 01 July 1992

The Optimal Depletion of the Theory of Exhaustible Resources

(1987). The Optimal Depletion of the Theory of Exhaustible Resources. Journal of Post Keynesian Economics: Vol. 9, No. 4, pp. 565-571.

Set-up costs and theory of exhaustible resources

Let there be several identical deposits of an exhaustible, non-reproducible resource, the working of a deposit entailing a set-up cost but no other costs. The deposits must be extracted in strict sequence with jump discontinuities of marginal benefit at transition points. Moreover, the average rate of increase of marginal benefit is less than the rate of interest.

Set-up costs and the theory of exhaustible resources

Let there be several identical deposits of an exhaustible, non-renewable resource, the working of each deposit entailing a set-up cost but no other costs. It is found that the optimal path of extraction dictates that the deposits must be removed in strict sequence with discontinuities of marginal benefit at transition points. Moreover, the average rate of increase of marginal benefit is less than the rate of interest. These results embellish Hotelling's rule relating to optimal methods of resource extraction.

SET‐UP COSTS AND THE THEORY OF EXHAUSTIBLE RESOURCES

ABSTRACT Let there be several identical deposits of an exhaustible, non‐renewable resource, the working of each deposit entailing a set‐up cost but no other costs. It is found that the optimal path of extraction dictates that the deposits must be removed in strict sequence with discontinuities of marginal benefit at transition points. Moreover, the average rate of increase of marginal benefit is less than the rate of interest. These results embellish Hotelling's rule relating to optimal methods of resource extraction.

Sufficient conditions applied to an optimal control problem of resource management

The purpose of this paper is twofold. First, by solving an interesting problem in the theory of exhaustible resources, it is exemplified how direct sufficiency conditions should properly be used in optimal control problems. The motivation for this aspect of the paper is the almost complete negligence in the economic literature of dealing properly with sufficiency conditions. Second, an important point in the discussion of J. Aarrestad ( Scand. J. Econom., 81 (1979), 522–565) is supplemented.

The Theory of Exhaustible Resources

It is shown in this paper that the price of an exhaustible resource in an economy of pure competition is not equal to the marginal cost of production and that, in this respect, the classical theory is the ‘worst possible case’ were the resources considered to be inexhaustible. The price of an almost depleted resource is shown to be equal to the marginal cost of production when the resource is exhausted, and on the other hand, its level depends on three factors: (a) the present cost of a substitute; (b) the life expectancy of the resource remaining; (c) the rates of interest on the international capital market. We have calculated from a coherent data assemblage the ‘right’ price for oil in the context of the theory, as it appeared prior to the 1973 crisis. This may be seen to have approximated the actual price ($2/bbl.). This is the optimal theoretical price produced using the pure competition of world resources. The technical, historical and strategical reasons behind this noteworthy convergence are given, reasons which establish scientifically the crisis as an ‘impasse’ in an outdated strategy which had become unable to adapt to new production characteristics. However, the theory of exhaustible resources shows that, even in an economy of pure competition, there is a natural revenue which cannot be considered systematically to be a revenue of a monopolistic nature, or even be judged in regard to the conclusion of the classical theory of pure and perfect competition.

The Net Social Benefits from a Research-Induced Cost-Reduction of an Energy Backstop Technology

Substantial effort has been devoted to the development of measures of benefit attributable to agricultural research that lowers commodity costs. With increasing scarcity of energy inputs, many research resources are being devoted to overcome this scarcity by reducing the costs of backstop technologies, i.e., nonexhaustible sources of energy output. Drawing from the theory of exhaustible resources and the literature of traditional surplus measures of benefit and cost, this paper develops a conceptual framework for quantifying the net social benefit for successful backstop cost-reducing energy research. 18 references.

Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market

The theory of exhaustible resources is modified to take account of the industrial organization of the world oil market. The cartel is viewed as a unified enterprise which dominates other extractors because of its larger reserves. Equilibrium price and sales paths are derived giving neither the dominant extractor nor the competitive fringe any incentive to change its intertemporal behavior. Under standard but simplified cost assumptions, it is shown that a disproportionate share of the increased profits results from the formation of the cartel goes to non-members and that the cartel's restriction on sales eventually leaves it the sole supplier of oil.

Extraction Costs in the Theory of Exhaustible Resources

This paper has two objectives. First, it reformulates the theory of optimal use of an exhaustible resource with more attention to the costs of extraction than has been customary in the literature. The output and shadow-price implications of optimal extraction are studied under these broader assumptions. Second, the paper provides some numerical solutions of a simple two-grade case, to give some feeling for the quantitative importance of changes in the supply of exhaustible resources. Our most striking result is, in fact, the suggestion that relatively large changes in resource availability generate very small changes in the sustainable level of final consumption.

Nash-Cournot Equilibrium for an Exhaustible Resource Like Oil

The theory of exhaustible resources is modified to take account of the industrial organization of the world oil industry. The oil cartel is viewed as unified enterprise, engaging in a non-cooperative game against firms in the non-cartel sector. Each of these firms in assumed to own an equal chare of the sector's oil; none, however, owns as much as the cartel. The Nash-Cournot equilibrium is examined. As teh number of non-cartel firms increases, they behave like competitive prices takers. The equilibrium converges to the standard "dominant firm model", adapted for exhaustible resources.

Conservation and the Theory of Exhaustible Resources

Conservationists have long argued that the free market neglects the needs of future generations. Economists who have examined this argument have stressed the dubious realism of any rigorous formulation of the conservationist position, but relatively little attention has been paid to the implications of policies designed to increase the weight given to future demands. Scott has conjectured that such policies might speed exhaustion of mineral resources. If he is correct, the usual conservationist argument that neglect of the future is equivalent to a too rapid use of resources would no longer hold. This article seeks to provide a rigorous proof of Scott's hypothesis.The economic literature has shown that all rigorous definitions of neglect of the future involve the use of higher than “desirable” interest rates. To explore the consequences of such interest rates, one requires a theory of how resource producers act. Such guidance is provided by the Gray-Hotelling pure theory of exhaustion. A simple test of the basic question is provided by showing how an industry that behaves according to theory would alter its actions if interest rates were lowered.Section III of this paper provides such a test. The first two sections provide the necessary preliminaries—examination of the justifications given for the contention that interest rates are too high, and a brief explanation of the pure theory of exhaustion. The final section discusses further implications of the basic theorem set out in Section III.