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Fundamental Economics of Depletable Energy Supply - page 14 / 30





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Resources for the Future

Krautkraemer and Toman

random, the aggregate extraction cost function cannot be described by a reserve stock indicator alone (Swierzbinski and Mendelsohn 1989).

If the discovery of deposits is “lumpy,” exploration and discovery can occur in “episodes,” with intervals of no exploration between those episodes. Exploration does not generally occur in strictly discrete episodes, but it does vary with the resource price, and large discoveries do put significant but temporary downward pressures on price. The theory would then predict that the in situ value of the resource increases between major discoveries and jumps up or down when exploration occurs, depending upon whether the exploration outcome is less or more favorable than expected. The resource price path can follow a “saw-tooth” pattern while still having a downward trend over some time periods, depending upon the actual exploration outcomes. The likelihood that the resource price will be increasing over time increases as unexplored prospects become more scarce.

Exploration also provides new information about future exploration prospects that can lead to revised expectations about the future value of the resource stock and generate new expected time paths for the resource price and quantity extracted. For example, a firm may revise its expectations about the probability of successful exploration either upward or downward in response to information obtained from its current exploration. In this case, a variety of patterns is possible for the realized price path, including a generally downward trend. The arrival of previously unanticipated information can alter the resource price, extraction, and exploration paths so that the observed price path deviates systematically from a deterministic calculation. The observed time paths for the resource price and in situ resource value may represent a combination of the initial portion of many different expected price paths rather than outcomes along one fully anticipated price path.

Moreover, because individual energy producers can learn something about the information possessed by others via observing their behavior (e.g., by another producer not drilling in a certain area), information has certain “public good” aspects. To ensure that enough information about energy resources is collected and disseminated to society at large, it may be necessary for the government to undertake or underwrite investments in resource delineation.


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