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An Economic Model of Oil Exploration and Extraction

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  • Alfred Greiner
  • Willi Semmler
  • Tobias Mette

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 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. Copyright Springer Science+Business Media, LLC. 2012

Suggested Citation

  • Alfred Greiner & Willi Semmler & Tobias Mette, 2012. "An Economic Model of Oil Exploration and Extraction," Computational Economics, Springer;Society for Computational Economics, vol. 40(4), pages 387-399, December.
    • Handle: RePEc:kap:compec:v:40:y:2012:i:4:p:387-399
    DOI: 10.1007/s10614-011-9272-0
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    References listed on IDEAS

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    1. Grune, Lars & Semmler, Willi, 2004. "Using dynamic programming with adaptive grid scheme for optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2427-2456, December.
    2. Krautkraemer, Jeffrey A., 2005. "Economics of Natural Resource Scarcity: The State of the Debate," Discussion Papers 10562, Resources for the Future.
    3. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    4. Krautkraemer, Jeffrey, 2005. "Economics of Natural Resource Scarcity: The State of the Debate," RFF Working Paper Series dp-05-14, Resources for the Future.
    5. Alfred Greiner, 2009. "Estimating penalized spline regressions: theory and application to economics," Applied Economics Letters, Taylor & Francis Journals, vol. 16(18), pages 1831-1835.
    6. Ruppert,David & Wand,M. P. & Carroll,R. J., 2003. "Semiparametric Regression," Cambridge Books, Cambridge University Press, number 9780521785167, January.
    7. Liu, P. T. & Sutinen, J. G., 1982. "On the behavior of optimal exploration and extraction rates for non-renewable resource stocks," Resources and Energy, Elsevier, vol. 4(2), pages 145-162, June.
    8. Stephanie Becker & Lars Grüne & Willi Semmler, 2007. "Comparing accuracy of second-order approximation and dynamic programming," Computational Economics, Springer;Society for Computational Economics, vol. 30(1), pages 65-91, August.
    9. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    10. Ruppert,David & Wand,M. P. & Carroll,R. J., 2003. "Semiparametric Regression," Cambridge Books, Cambridge University Press, number 9780521780506, January.
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    Cited by:

    1. Nyambuu, Unurjargal & Semmler, Willi, 2020. "Climate change and the transition to a low carbon economy – Carbon targets and the carbon budget," Economic Modelling, Elsevier, vol. 84(C), pages 367-376.
    2. Sepehr Ramyar & Farhad Kianfar, 2019. "Forecasting Crude Oil Prices: A Comparison Between Artificial Neural Networks and Vector Autoregressive Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(2), pages 743-761, February.
    3. Behnaz Minooei Fard & Willi Semmler & Giovanni Di Bartolomeo, 2023. "Rare Earth Elements: A game between China and the rest of the world," Working Papers in Public Economics 235, Department of Economics and Law, Sapienza University of Roma.
    4. Nyambuu, Unurjargal & Semmler, Willi, 2014. "Trends in the extraction of non-renewable resources: The case of fossil energy," Economic Modelling, Elsevier, vol. 37(C), pages 271-279.
    5. Yang, Shubo & Jahanger, Atif & Balsalobre-Lorente, Daniel, 2024. "Sustainable resource management in China's energy mining sector: A synthesis of development and conservation in the FinTech era," Resources Policy, Elsevier, vol. 89(C).

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    More about this item

    Keywords

    Non-renewable resources; Optimal control; Non-parametric estimation; Oil production; Q30; C61;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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