Does the Oil Price Adjust Optimally to Oil Field Discoveries?

CER-ETH – Center of Economic Research at ETH Zurich Working Paper 12/169

30 Pages Posted: 17 Nov 2012

See all articles by Lisa Leinert

Lisa Leinert

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: November 16, 2012

Abstract

The Hotelling rule argues that the price for a non-renewable resource adjusts to the shadow value of the resource, reflecting its remaining availability. This study provides an empirical test of this hypothesis. It investigates whether the price of crude oil does adjust to unexpected news about oil field discoveries. The observed price reaction is compared with a prediction of the price decline as derived from the Hotelling model. This study finds evidence for an adjustment of the price to news about greater resource availability: the price of crude oil declines on average by 0.88% on discovery days. The degree of adjustment to the new level of scarcity is not found to differ significantly from the social optimum. Thus, there is evidence for the existence of a shadow cost component - a necessary pre-requisite for the Hotelling rule to hold.

Keywords: Non-Renewable Resources, Oil Price, Exhaustible Resources

JEL Classification: Q31, Q41, Q14

Suggested Citation

Leinert, Lisa, Does the Oil Price Adjust Optimally to Oil Field Discoveries? (November 16, 2012). CER-ETH – Center of Economic Research at ETH Zurich Working Paper 12/169, Available at SSRN: https://ssrn.com/abstract=2176648 or http://dx.doi.org/10.2139/ssrn.2176648

Lisa Leinert (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

CER-ETH Center of Economic Research at ETH Zurich
ZUE F7
Zurich, 8092
Switzerland

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