Depletion and development: natural resounce supply with endogenous field opening

Working paper

Supply of a non-renewable resource adjusts through two margins: the rate at which new fields are opened, and the rate of depletion of open fields. The paper combines these margins in a model in which there is a continuum of fields with varying capital costs. Opening a new field involves sinking a capital cost, and the date of opening is chosen to maximize the present value of the field. Depletion of each open field follows a Hotelling rule, modified by the fact that faster depletion reduces the amount that can ultimately be extracted. The paper studies the equilibrium paths of output and price. Under specific but reasonable assumptions on demand and the cost distribution of deposits it is found that the rate of growth of price is constant and independent of the rate of interest, depending instead on characteristics of demand and geology.

Authors: Venables, A

• Publication status: Published
• Publisher: University of Oxford
• Series: OxCarre Papers
• Publication date: 2011-06-20
• Paper number: 62
• Keywords: exhaustible; non-renewable resource; depletion; fossil fuel; Hotelling; carbon tax