29 Pages Posted: 3 Nov 2013 Last revised: 28 Mar 2015
Date Written: February 1, 2011
This paper contributes to the theories commodity prices and exhaustible resources by examining simultaneous optimal resource extraction and dynamic capacity building. I analyze the ways in which random demand process and irreversible capacity options shape the long-term price and volatility path of exhaustible resource. The model suggest a mean-reverting price path in the initial stages of extraction which is a possible resolution for the old puzzle of why the predictions of Hotelling's model (Hotelling (1931)) are not observed in reality. The results of this paper can contribute to a better understanding of long-run energy and commodity supply elasticity and price dynamics.
Keywords: Commodity Prices, Capacity Expansion Options, Hotelling Role, Investment Under Uncertainty
JEL Classification: Q31, G13
Suggested Citation: Suggested Citation