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Modeling the Expansion of Oil Production in South Texas and Mexico

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  • David Hudgins
  • Jim Lee

Abstract

This study develops a dynamic output adjustment model that characterizes the expansion of U.S. oil production firms into Mexico. Using a Cobb-Douglas framework that differentiates U.S. and Mexican plants, we derive the comparative, static, risk-free, dual-country production levels for the multinational operations in each of the two countries when there are no capital constraints and perfect information. Given capital and labor constraints on Mexican production, the article uses an optimal control framework to derive the optimal production levels over time during a fixed adjustment period. This provides a pragmatic strategy for planning a growth path for investment in foreign operations.

Suggested Citation

  • David Hudgins & Jim Lee, 2016. "Modeling the Expansion of Oil Production in South Texas and Mexico," The International Trade Journal, Taylor & Francis Journals, vol. 30(5), pages 387-414, October.
    • Handle: RePEc:taf:uitjxx:v:30:y:2016:i:5:p:387-414
    DOI: 10.1080/08853908.2016.1204965
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    References listed on IDEAS

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    1. Ryan Kellogg, 2014. "The Effect of Uncertainty on Investment: Evidence from Texas Oil Drilling," American Economic Review, American Economic Association, vol. 104(6), pages 1698-1734, June.
    2. Hartley, Peter & Medlock III, Kenneth B., 2008. "A model of the operation and development of a National Oil Company," Energy Economics, Elsevier, vol. 30(5), pages 2459-2485, September.
    3. Lee, Jim, 2015. "The regional economic impact of oil and gas extraction in Texas," Energy Policy, Elsevier, vol. 87(C), pages 60-71.
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