Hotelling Under Pressure

Soren Anderson, Ryan Kellogg and Stephen Salant

No 20280, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs and explains why production is typically constrained. It also rationalizes regional production peaks and observed patterns of price expectations following demand shocks.

JEL-codes: E22 L71 Q3 Q4 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ene, nep-ind and nep-mac
Note: EEE IO
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Citations: View citations in EconPapers (48)

Published as Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, vol 126(3), pages 984-1026.

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Journal Article: Hotelling under Pressure (2018)
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