Lec. 10: Resource management Flashcards
What is the difference between reserves and resources?
Reserves vs. resources
Graph
- Exploration and depletion costs over Degree of certainty of existence
- Degree of certainty of existence = known + Exploration and depletion costs < MP
–> Reserves - Degree of certainty of existence = known + Exploration and depletion costs > MP
–> Uneconomic resources - Degree of certainty of existence = unknown
–> Speculative resources
Name and explain the basic assumptions of the Hotelling model.
Hotelling model
- Is a simple model to answer the question whether to extract or not to extract a finite, non-renewable resource
- Perspective of the resource owner
Basic assumptions
- Perfectly competitive markets
–> Resource owner is ‘price taker’ - Resource owners
–> Profit maximizing behaviour
–> Constant marginal extraction costs c
–> Perfect information about the finite resource stock S
What is Hotelling’s rule?
What is the scarcity rent?
Hotelling’s rule
- A profit maximizing resource owner of a non-renewable resource with a finite resource stock S and with constant marginal extraction costs c extracts the entire stock S over the planning period and maximizes his NPV
- Hotelling’s rule:
p_t = c + lambda (1 + i)^t
Scarcity rent: lambda_t = lambda_0 * (1 + i)^t = p_t - c
- If S = infinity –> lambda_t = 0 –> p_t = c = const.
- If infinity > S > 0 –> lambda_t > 0 –> lambda_t = p_t - c = lambda_0 * (1 + i)^t
Hotelling’s rule
What role does a backstop technology play?
Hotelling’s rule + backstop technology
- Eventually p_t will attain the price p_subst at which some other energy source becomes competitive as a substitute.
- This alternative is the backstop technology.
- This should happen exactly at the end of the period when we have exhausted the supply.
Apply Hotelling’s rule to EU ETS.
Hotelling’s rule + EU ETS
- CO2 certificates available between now and 2030 are a finite resource due to the emission cap of the EU ETS
- We can estimate the certificate price in 2030 required to reach the 55% greenhouse gas reduction compared to 1990 levels based on the marginal abatement cost (“marginale Vermeidungskosten”)
- If we discount the certificate price in 2030 required to estimated by researchers to today reach this emission reduction we get todays certificate price
- Result: Today’s CO2 certificate prices appear to be consistent with the Hotelling rule
Why does Hotelling’s rule fail on most markets in real life?
Why does Hotelling’s rule fail on most markets in real life?
For most extractable resources, the real world does not conform with Hotelling because of the strong simplifying assumptions behind the model.
- New discoveries of reserves and resources increase the stock S over time
- Recycling can reuse already-extracted resources
- Extraction costs c change, either increasing for ever-harder-to-extract sites (e.g. ever deeper coal mines, lower pressure gas/oil), or decreasing due to learning in extraction technology (e.g. fracking for oil and gas)
- Suppliers have a monopoly and can influence price (cf. 1970s oil crises or 2021-2 gas crisis)
- Demand pattern changes (e.g. shift to EVs) or shocks (e.g. Covid) affect price
What does the Hubbert curve describe?
To what extend does it apply to reality?
Hubbert curve
- Total resource is finite, initially production grows exponentially as costs fall with discovery and learning, reach a peak, then decline as marginal costs rise
To what extend does it apply to reality?
- The Hubbert curve does not accurately describe production patterns in the short term
–> E. g. As he predicted oil production in the US did indeed peak in the 1970s, but returned to peak height in last decade thanks to shale oil extraction with fracking - However, in the long term (+/- 5000 year perspective) the curve might describe production patterns more accurately.
