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. b. What is the oil price directly after this news becomes public? When will the world run out of oil, assuming no more oil is discovered? [Hint: use a spreadsheet.] You have a couple million dollars to spend on Dec 31st, 1999. You decide to quickly buy out all small oil producers. By Jan 1st, 2000, you are the owner of all remaining reserves. Please answer only part b
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.
b. What is the oil price directly after this news becomes public? When will the world
run out of oil, assuming no more oil is discovered? [Hint: use a spreadsheet.]
You have a couple million dollars to spend on Dec 31st, 1999. You decide to quickly buy out all
small oil producers. By Jan 1st, 2000, you are the owner of all remaining reserves.
Please answer only part b
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