NRRSlides

NRRSlides - NONRENEWABLE RESOURCES 1 Introduction...

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3/16/2011 NRResources 1 NONRENEWABLE RESOURCES 1. Introduction: definitions, policy questions, topics. 2. Measures of abundance and responses to scarcity 3. Nonrenewable resource markets a. Investments in exploration and development b. Production from known reserves 4. Hotelling’s model of nonrenewable resources a. Hotelling’s rule for price b. Comparative dynamics of price paths c. Monopoly vs. competition d. What drives oil prices?
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3/16/2011 NRResources 2 NONRENEWABLE RESOURCES (cont.) 5. Applications and policy issues a. Effects of a backstop technology b. Extraction from a common pool c. Environmental impacts: PXP project d. Environmental impacts: oil spills e. Preventing ocean dumping f. ANWR and the price of gasoline g. Political risk and resource use h. The ‘resource curse’ (mention)
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3/16/2011 NRResources 3 Current (Proved) Reserves: Deposits that have been discovered, are known to exist, and can be extracted profitably; current price exceeds development and extraction cost. Measures of Abundance, 1:
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3/16/2011 NRResources 4 Potential Reserves: (Ultimately Recoverable Resources) Deposits for which technical feasibility of extraction has been demonstrated or seems likely; price may or may not cover development and extraction cost. Measures of Abundance, 2:
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3/16/2011 NRResources 5 Resource Endowment (Resource Base or Crustal Abundance): Natural abundance of a mineral in the earth's crust (to depth of 1 km., concentration > 1 pp mill), oceans, atmosphere, regardless of whether or not extraction and use is technically or economically feasible. Measures of Abundance, 3:
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3/16/2011 NRResources 7
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3/16/2011 NRResources 11 Exploration and Development Large share (2/3 in US) of total expenditure by petroleum industry. Long lead times: revenue may not be realized for decades after exploration expenditures are made. Expected future growth rates in demand are key factor. Current and future interest rates also matter; Factors in 2007-2009 gyrations in oil prices. Security of property rights also matters (evidence later)
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3/16/2011 NRResources 12 Hotelling Rule for Competitive Market 1. Notation t P price of extracted mineral in year t . C unit extraction cost (assumed constant). r interest rate (assumed constant). A choke price; price at which quantity demanded goes to zero. T date when exhaustion occurs, i.e., year last unit is consumed. C P t value of a unit of the mineral in the ground. R Size of initial reserve.
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3/16/2011 NRResources 13 $/unit Quantity per unit time P 1 P 2 A A: choke price C: unit cost of extraction P: price Demand curve for nonrenewable resource C 1 Q 2 Q D
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3/16/2011 NRResources 14 2. Conditions for Equilibrium (i) t t r C P ) 1 ( ) ( is equal in all periods. (Production in any period yields same present value profit per unit.) This implies     t t r C P C P 1 0 (ii) A P T . (Last unit sold sells at choke price.)
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3/16/2011 NRResources 15 3. Explanation of conditions Condition (i): Consider one unit of the mineral in the ground.
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This note was uploaded on 12/26/2011 for the course ECON 122 taught by Professor Staff during the Fall '08 term at UCSB.

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NRRSlides - NONRENEWABLE RESOURCES 1 Introduction...

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