Reserve Lifetime and Depletion in Exhaustible Resource Extraction Under Uncertainty

28 Pages Posted: 1 Mar 2014

Date Written: December 2, 2013

Abstract

This paper studies the implications for reserve lifetime and related quantities in a continuous time model of resource extraction under uncertainty. Both the resource price and the extracted amount are assumed to follow stochastic processes. Reserve lifetime is determined by the profit-maximizing firms optimal decision of when to close down production. We derive closed form expressions for the expected value and the probability distribution of reserve lifetime, the expected level of depletion, and the expected streams of discounted revenues and costs until closing.

Keywords: Resource extraction, optimal stopping, reserve lifetime, depletion, real options

JEL Classification: Q30, G11, G13, M11, C61, C41, C44

Suggested Citation

Larsson, Karl, Reserve Lifetime and Depletion in Exhaustible Resource Extraction Under Uncertainty (December 2, 2013). Available at SSRN: https://ssrn.com/abstract=2362512 or http://dx.doi.org/10.2139/ssrn.2362512

Karl Larsson (Contact Author)

Statistics Sweden ( email )

Karlav├Ągen 100
Stockholm
Sweden

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