Iowa NSF EPSCoR Energy Policy Seminar Series

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Date/Time:Friday, 25 Mar 2016 from 12:00 pm to 1:20 pm
Location:1306 Elings Hall
Channel:Bioeconomy Institute
Categories:Lectures Live Green
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"Hotelling Under Pressure," Soren Anderson, Michigan State University, East Lansing.

We show that oil production from existing wells in Texas does not respond to oil prices, while drilling activity and costs respond strongly. 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, explains why the production constraint typically binds, and rationalizes regional production peaks and observed patterns of prices, drilling, and production following demand and supply shocks.

Soren Anderson is an associate professor with the Department of Economics and Department of Agricultural, Food, and Resource Economics at Michigan State University. He specializes in energy economics, oil, gasoline, and ethanol markets, and automobile fuel economy.