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Fundamental Economics of Depletable Energy Supply - page 23 / 30





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Resources for the Future

Krautkraemer and Toman

or shifts in market conditions can be separated out and understood.

However, success with this class of models has been limited, notwithstanding their conceptual appeal. The models are difficult and data-intensive to construct and estimate; they are not well-suited to geographical or other finer-grained breakdowns of activity into constituent parts; and the results have not always been very powerful. In particular, some approaches have not coped well with what appear to be basic nonlinearities in the relationship between unit supply cost and reserves. A prospect for future work is a better blending of the engineering expertise found in energy systems modelers with the dynamic economic models discussed here (Walls 1994).

7. Concluding Remarks

Finite availability is one defining characteristic of a depletable energy resource and generates the “Hotelling Rule” that the marginal value of a nonrenewable resource stock increases at the rate of interest. However, many other factors, including exploration, capital investment, and heterogeneous reserve quality, also are important to the economics of energy depletion and development. The investigation of how these other factors affect the empirical implications of the Hotelling model has been spurred by the frequent failure of the basic Hotelling model to explain the observed dynamic behavior of nonrenewable resource prices and in situ values.

These other factors can affect price and depletion paths in a number of ways, particularly when considered in combination with each other. The variety of possible outcomes makes it difficult, if not impossible, to make any general predictions about the overall impact on price and extraction paths. These other factors, particularly the discovery of new deposits and technological progress that lowers the cost of extracting and processing nonrenewable resources, appear to play a relatively greater role than finite availability in determining observed empirical outcomes.

While models that include these other factors have enriched the Hotelling model, they have not completely reconciled the economic theory of nonrenewable resources with the observed data. The distinction between the responses of supply to anticipated versus


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