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Oil Prices Are Still Too High

Arlon R. Tussing

Year: 1985
Volume: Volume 6
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol6-No1-2
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Abstract:
Predictions that the constant-dollar price of oil will rise again to surpass and remain above the all-time peaks reached in 1981 rest on strong logical premises. The truism that natural resources are finite unites with the paradigms of Malthus, Ricardo, and Hotelling to imply that the terms of trade will forever flow in favor of resource owners, particularly the owners of depletable resources.



Pricing Policies of an Oil Cartel with Expectation of Substitute Producers

Majid Ahmadian

Year: 1988
Volume: Volume 9
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No1-10
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Abstract:
The proposition that the net price in a competitive market and the net marginal revenue in a monopolistic market rise at the rate of interest was first demonstrated by Hotelling (1931) for a non-durable exhaustible resource. However, Levhari and Liviatan (1977) and Fisher (1981) have shown that Hotelling's r-percent rule is not valid when extraction costs rise with cumulative production. This r-percent rule also applies to a perfectly durable resource when the resource is produced in a competitive market. It does not apply in the case of a monopolistic market.



On the Economics of Improved Oil Recovery: The Optimal Recovery Factor from Oil and Gas Reservoirs

Arild N. Nystad

Year: 1988
Volume: Volume 9
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No4-4
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Abstract:
This paper investigates an oil company's optimal depletion of oil and gas reservoirs, taking into account that the depletion policy itself influences the recoverable reserves, i.e. determines the recovery factor. The emphasis is on the role of up-front capital costs. The depletion policy is derived from the amount of investment in production and associated injection projects, represented in a stylized fashion. I make a comparative static study of how various economic factors influence the company's choice of an optimal depletion policy and, thus, implicitly of an optimal recovery factor.



The Hotelling Principle: Autobahn or Cul de Sac?

G. C. Watkins

Year: 1992
Volume: Volume 13
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No1-1
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Abstract:
The economics of relations between prices and resource stocks has been dominated by the Hotelling Principle. But seemingly little attention has been given to the Principle by the oil and gas industry itself. In this paper the Principle is appraised, some new empirical results based on the value of oil and gas reserves sales are introduced, models which relax more of the Hotelling assumptions are reviewed, and the industry milieu in the context of a Hotelling Style framework is discussed. The Principle is seen as affording fundamental theoretical insights, but is not found to cope well with industry realities.



IAEE Convention Speech: Energy, Exhaustion, Environmentalism, and Etatism

Richard L. Gordon

Year: 1994
Volume: Volume15
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No1-1
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Abstract:
Editor's Note: The author, Dr. Richard L. Gordon, won the IAEE's Outstanding Contributions Award for 1992. The following article is based on his acceptance speech given at the 16th international conference of the IAEE held in Bali, Indonesia, from July 27-29, 1993. The Association awards a prize annually for outstanding contributions to the profession of energy economics and to its literature.



The Hotelling Principle and In-Ground Values of Oil Reserves: Why the Principle Over-Predicts Actual Values

Stephen L. McDonald

Year: 1994
Volume: Volume15
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No3-1
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Abstract:
Two articles previously published in this Journal (Watkins 1992 and Adelman 1993) reported that the valuation version of the Hotelling Principle over-predicts in-ground values of oil and gas reserves by a factor of approximately two. This paper shows these results are to be expected once it is understood that: (1) the Principle assumes individual operators have the effective freedom to schedule extraction rates so as to make net prices rise at the rate of discount, regardless of the course of gross (wellhead) prices; and (2) the long-prevailing system of regulating oil well spacing and extraction rates in the United States and Canada, designed to deal with the common pool problem, effectively denies operators that freedom. The discrepancy between actual in-ground values and those predicted by the Hotelling Principle suggests the benefits to be had by substituting compulsory reservoir unitization cum manager freedom for the current system of regulation.



Simple Analytics of Valuing Producing Petroleum Reserves

Graham A. Davis and Robert D. Cairns

Year: 1998
Volume: Volume19
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No4-6
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Abstract:
We modify the approach to valuing mineral reserves that is current in economic literature by considering a net present-value rule under uncertainty. Direct application of Hotelling's rule is found to be inappropriate. The modification is such that the present value is approximately half that proposed by the Hotelling Valuation Principle.



Oil Production in the Lower 48 States: Economic, Geological, and Institutional Determinants

Robert K. Kaufmann and Cutler J. Cleveland

Year: 2001
Volume: Volume22
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No1-2
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Abstract:
In this paper, we establish an empirical model for oil production in the lower 48 states that represents its economic, physical, and institutional determinants. We estimate a vector error correction model for oil production in the lower 48 states that specifies real oil prices, average production costs, and prorationing by the Texas Railroad Commission. These modifications enable us to generate a model that accounts for most of the variation in oil production in the lower 48 states between 1938 and 1991. The result that oil production in the lower 48 states shares stochastic trends with real oil prices, average production costs, and prorationing indicates that accuracy of Hubbert's bell shaped curve is fortuitous. The importance of these factors also indicates why the basic Hotelling model cannot replicate the production path for oil in the lower 48 states. This inability is critical. The negative economic effects associated with high prices and energy shortages imply that the importance of inconsistencies with the basic Hotelling model identified by this analysis may be sufficient to warrant a greater degree of government intervention in the transition from oil than is currently envisioned by most policy makers.



Adelman's Rule and the Petroleum Firm

Robert D. Cairns and Graham A. Davis

Year: 2001
Volume: Volume22
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-2
No Abstract



Modeling Peak Oil

Stephen P. Holland

Year: 2008
Volume: Volume 29
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-4
View Abstract

Abstract:
Peak oil refers to the future decline in world production of crude oil and to the accompanying potentially calamitous effects. The majority of the literature on peak oil is non-economic and ignores price effects even when analyzing policies. Unfortunately, most economic models of depletable resources do not generate production peaks. I present four models which generate production peaks in equilibrium. Production increases in the models are driven by: demand increases, cost reductions through advancing technology, cost reductions through reserve additions, and production capacity increases through site development. Production decreases are driven by scarcity. The models do not rely on market failures and indicate that a peak in production may arise from efficient intertemporal optimization. The models show that prices are a better indicator of impending scarcity than peaking is and that peak production can occur when any percentage from 0-100% of the original deposit remains.




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