Uncertainty and the pricing of exhaustible resources
Name
MIT-EL-79-021WP-05768933.pdf
Size
1.74 MB
Format
Adobe PDF
Checksum (MD5)
3343b96e1ee2be0439eab294b727ab41
Author(s)
Pindyck, Robert S.
Date Issued
April 1979
Publisher
MIT Energy Laboratory
Series/Report no.
MIT-EL
79-021WP
Abstract
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.
Subjects
Power resources |x Mathematical models.
Power resources |x Prices.
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