An Economic Model of Oil Exploration and Extraction

27 Pages Posted: 9 Sep 2008 Last revised: 30 Dec 2012

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Tobias Mette

affiliation not provided to SSRN

Date Written: September 8, 2008

Abstract

In this paper we present empirical facts on oil exploitation and a model that can replicate some of these facts. In particular, we show that the time path of the oil price, on the one hand, and the extraction and discovery rate, on the other hand, seem to follow a U-shaped and an inverted U-shaped relationship, respectively, which is confirmed by simple non-parametric estimations. Next, we present a theoretical model where a monopolistic resource owner maximizes inter-temporal profits from exploiting a non-renewable resource where the price of the resource depends on the extraction rate and on cumulated past extraction. The resource is finite and only a part of the resource is known while the rest has not yet been discovered. The analysis of that model demonstrates that the extraction rate and the price of the resource show the empirically observed pattern if the stock of the initially known resource is small.

Keywords: Non-renewable resources, optimal control, non-parametric estimation, oil production

JEL Classification: Q30, C61

Suggested Citation

Greiner, Alfred and Semmler, Willi and Mette, Tobias, An Economic Model of Oil Exploration and Extraction (September 8, 2008). Available at SSRN: https://ssrn.com/abstract=1264967 or http://dx.doi.org/10.2139/ssrn.1264967

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Tobias Mette

affiliation not provided to SSRN ( email )

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