Depletion and Development: Natural Resource Supply with Endogenous Field Opening

31 Pages Posted: 17 Oct 2011

See all articles by Anthony J. Venables

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: October 17, 2011

Abstract

This paper develops a model in which supply of a non-renewable resource can adjust through two margins: the rate of depletion and the rate of field opening. Faster depletion of existing fields means that less of the resource can ultimately be extracted, and optimal depletion of open fields follows a (modified) Hotelling rule. Opening a new field involves sinking a capital cost, and the timing of field opening is chosen to maximize the present value of the field. Output dynamics depend on both depletion and field opening, and supply responses to price changes are studied. In contrast to Hotelling, the long run equilibrium rate of growth of prices is independent of the rate of interest, depending instead on characteristics of demand and geologically determined supply.

Keywords: non-renewable resource, depletion, exhaustible, Hotelling, fossil fuel, carbon tax

JEL Classification: D900, Q300, Q400, Q500

Suggested Citation

Venables, Anthony J., Depletion and Development: Natural Resource Supply with Endogenous Field Opening (October 17, 2011). CESifo Working Paper Series No. 3608. Available at SSRN: https://ssrn.com/abstract=1945087

Anthony J. Venables (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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