Along with many other producers, you own a small oil well. The market is very competitive. The marginal extraction cost is $10 per barrel. The interest rate is 5%. The annual demand for oil is Q = 90,000 – 2,000P where Q is in barrels per year and P is in dollars per barrel. Use your knowledge about Hotelling’s Rule to answer the following questions: Oil is trading for $25/bbl on Jan 1st, 1999. What do you expect the path of oil prices and extraction quantities to be from 1999-2010 (assuming no shocks to the market)? A day later, on Jan 2nd, 1999, the Wall Street Journal opens with a story that there is now a more reliable reserves estimate. Total reserves are estimated at 760,000 barrels.
Along with many other producers, you own a small oil well. The market is very competitive. The
marginal extraction cost is $10 per barrel. The interest rate is 5%. The annual demand for oil is
Q = 90,000 – 2,000P where Q is in barrels per year and P is in dollars per barrel.
Use your knowledge about Hotelling’s Rule to answer the following questions:
Oil is trading for $25/bbl on Jan 1st, 1999. What do you expect the path of oil prices
and extraction quantities to be from 1999-2010 (assuming no shocks to the market)?
A day later, on Jan 2nd, 1999, the Wall Street Journal opens with a story that there is now a
more reliable reserves estimate.
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