Uncertainty and the pricing of exhaustible resources
Demand and reserve uncertainty are included in a simple model of an exhaustible resource market by allowing the demand function and the reserve level to fluctuate via continuous-time stochastic processes. Thus, producers always know current demand and reserves, but do not know what demand and...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | en_US |
| Published: |
MIT Energy Laboratory
2006
|
| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/35223 |
| _version_ | 1826212878058782720 |
|---|---|
| author | Pindyck, Robert S. |
| author_facet | Pindyck, Robert S. |
| author_sort | Pindyck, Robert S. |
| collection | MIT |
| description | Demand and reserve uncertainty are included in a simple model of an
exhaustible resource market by allowing the demand function and the reserve
level to fluctuate via continuous-time stochastic processes. Thus, producers
always know current demand and reserves, but do not know what demand and
reserves will be in the future. We show that demand uncertainty has no
effect on the expected dynamics of market price, while reserve uncertainty
shifts the expected rate of change of price only if extraction costs are
nonlinear in reserves. However if the demand function is nonlinear, both
demand and reserve uncertainty affect the dynamics of production, whatever
the character of extraction costs. The model is also extended to include
exploration, first as a means of reducing uncertainty, and second as a
means of accumulating reserves, with uncertainty over the future response
of discoveries to exploratory effort. |
| first_indexed | 2024-09-23T15:39:34Z |
| format | Working Paper |
| id | mit-1721.1/35223 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T15:39:34Z |
| publishDate | 2006 |
| publisher | MIT Energy Laboratory |
| record_format | dspace |
| spelling | mit-1721.1/352232019-04-12T08:34:50Z Uncertainty and the pricing of exhaustible resources Pindyck, Robert S. Power resources |x Mathematical models. Power resources |x Prices. Demand and reserve uncertainty are included in a simple model of an exhaustible resource market by allowing the demand function and the reserve level to fluctuate via continuous-time stochastic processes. Thus, producers always know current demand and reserves, but do not know what demand and reserves will be in the future. We show that demand uncertainty has no effect on the expected dynamics of market price, while reserve uncertainty shifts the expected rate of change of price only if extraction costs are nonlinear in reserves. However if the demand function is nonlinear, both demand and reserve uncertainty affect the dynamics of production, whatever the character of extraction costs. The model is also extended to include exploration, first as a means of reducing uncertainty, and second as a means of accumulating reserves, with uncertainty over the future response of discoveries to exploratory effort. Research supported by National Science Foundation Grant no. SOC77-24573. 2006-12-19T16:43:29Z 2006-12-19T16:43:29Z 1979-04 Working Paper 05768933 http://hdl.handle.net/1721.1/35223 en_US MIT-EL 79-021WP 1823783 bytes application/pdf application/pdf MIT Energy Laboratory |
| spellingShingle | Power resources |x Mathematical models. Power resources |x Prices. Pindyck, Robert S. Uncertainty and the pricing of exhaustible resources |
| title | Uncertainty and the pricing of exhaustible resources |
| title_full | Uncertainty and the pricing of exhaustible resources |
| title_fullStr | Uncertainty and the pricing of exhaustible resources |
| title_full_unstemmed | Uncertainty and the pricing of exhaustible resources |
| title_short | Uncertainty and the pricing of exhaustible resources |
| title_sort | uncertainty and the pricing of exhaustible resources |
| topic | Power resources |x Mathematical models. Power resources |x Prices. |
| url | http://hdl.handle.net/1721.1/35223 |
| work_keys_str_mv | AT pindyckroberts uncertaintyandthepricingofexhaustibleresources |