Natural resource extraction and exploration under uncertainty

Thesis/Dissertation · Thu Jan 01 04:00:00 EST 1981

OSTI ID:5557295

Devarajan, S

There are at least two reasons why the market for natural resources may differ from that of a standard commodity in a perfectly competitive economy. First, natural resources are nonrenewable: extracting a barrel of oil today leaves one less barrel for future generations. Second, the global endowment of resources - the size, quality and location of resource deposits - is for most part unknown. In this dissertation, a model is presented that captures these two aspects of natural resources, but does so in a manner somewhat different from the standard literature. The resource is viewed as inexhaustible, but occurring in a continuum of grades. Having spelled out this two-period, stochastic dynamic optimization model, it is used to answer three questions: (1) if extraction today places a burden on future users, what is the social cost of extracting a nonrenewable resource and how may it be estimated; (2) how does risky exploration affect the optimal strategies of resource firms; since extraction depletes reserves while exploration augments them, the uncertainty can affect both the extractive and exploratory decisions; and (3) the normative question, does exploratory risk cause the competitive equilibrium to diverge from the social optimum.

• OSTI ID: 5557295
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
290400* -- Energy Planning & Policy-- Energy Resources
ECONOMIC ANALYSIS
ECONOMICS
EXPLORATION
MATHEMATICAL MODELS
OPTIMIZATION
RESERVES
RESOURCE DEPLETION
RESOURCE DEVELOPMENT
RESOURCES
SOCIAL IMPACT
STOCHASTIC PROCESSES