Estimation of the Hotelling Rule for Oil under Stochastic Investment Opportunities

This empirical work uses market capitalization of oil companies and proved reserves to investigate the role of in-ground oil stocks in risk diversification. It builds on the theoretical model of Gaudet and Khadr [1991], who use an intertemporal capital asset pricing approach to derive the stochastic version of the Hotelling rule which forms the basis for the estimations done in this chapter. The proxy used for the scarcity rent of oil is the difference between the growth rate of market capitalization of oil firms and that of oil proved reserves. In estimating the Gaudet and Khadr’s stochastic Hotelling rule, we rely on an econometric approach that combines both the Nowman [1997] method for estimating diffusion processes and the Delta method. The empirical results suggest that holding oil reserves as assets can constitute a form of insurance against adverse long-run market fluctuations.