Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility

The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non-oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.

[1]  Laurence Jacquet.  Take It or Leave It: Take-Up, Optimal Transfer Programs, and Monitoring , 2010, SSRN Electronic Journal.

[2]  N. Long,et al.  How to eat a cake of unknown size: The case of a growing cake , 1985 .

[3]  F. Ploeg.  Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights: A Puzzle , 2010, SSRN Electronic Journal.

[4]  D. Bank.  THE PUNGENT SMELL OF “ RED HERRINGS ” : Subsoil assets , rents , volatility and the resource curse , 2009 .

[5]  W. Richter,et al.  Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth , 2009, SSRN Electronic Journal.

[6]  Mason Gaffney,et al.  Extractive Resources and Taxation , 1969 .

[7]  D. Newbery,et al.  The theory of commodity price stabilization , 1981 .

[8]  P. Bates,et al.  Toward a conceptual model of floodplain water table response , 2004 .

[9]  M. Beine,et al.  Migration and Networks: Does Education Matter More than Gender? , 2010, SSRN Electronic Journal.

[10]  J. Wrona,et al.  Offshoring Tasks, Yet Creating Jobs? , 2010, SSRN Electronic Journal.

[11]  J. Komlos,et al.  The Trend of BMI Values Among US Adults , 2010, SSRN Electronic Journal.

[12]  A. M. Ulph,et al.  Exhaustible resources and cartels: an intertemporal Nash-Cournot model , 1980 .

[13]  Clara Graziano,et al.  Optimal Delegation when the Large Shareholder has Multiple Tasks , 2010, SSRN Electronic Journal.

[14]  Oskar Kowalewski,et al.  Why do Foreign Banks Withdraw from Other Countries? A Panel Data Analysis , 2010, SSRN Electronic Journal.

[15]  Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility , 2010, SSRN Electronic Journal.

[16]  J. Brunner,et al.  Optimal Taxation of Bequests in a Model with Initial Wealth , 2012 .

[17]  B. V. Praag,et al.  UvA-DARE ( Digital Academic Repository ) Well-being inequality and reference groups : an agenda for new research , 2011 .

[18]  Miles S. Kimball.  Precautionary Saving in the Small and in the Large , 1989 .

[19]  The political economy of public savings and the role of capital mobility , 1998 .

[20]  Nadine Riedel,et al.  Do Governments Tax Agglomeration Rents? , 2010, SSRN Electronic Journal.

[21]  A. Venables,et al.  Macroeconomics of sustainability transitions: Second-best climate policy, Green Paradox, and renewables subsidies , 2011 .

[22]  F. Van Der Ploeg,et al.  Inefficiency of credible strategies in oligopolistic resource markets with uncertainty , 1987 .

[23]  Conny Wunsch,et al.  Evaluating Nationwide Health Interventions When Standard Before-After DoesnﾒT Work: Malawi's Itn Distribution Program , 2010, SSRN Electronic Journal.

[24]  H. Theil,et al.  Economic Forecasts and Policy. , 1959 .

[25]  G. Caporale,et al.  Time‐Varying Spot and Futures Oil Price Dynamics , 2010, SSRN Electronic Journal.

[26]  R. Pindyck.  Uncertainty and Exhaustible Resource Markets , 1980, Journal of Political Economy.

[27]  Valentina Bosetti,et al.  What Should We Expect from Innovation? A Model-Based Assessment of the Environmental and Mitigation Cost Implications of Climate-Related R&D , 2010, SSRN Electronic Journal.

[28]  Rick van der Ploeg,et al.  Is Norway's Bird-in-Hand Stabilization Fund Prudent Enough? Fiscal Reactions to Hydrocarbon Windfalls and Graying Populations , 2009, SSRN Electronic Journal.

[29]  E. Massetti,et al.  The Optimal Climate Policy Portfolio When Knowledge Spills Across Sectors , 2010, SSRN Electronic Journal.

[30]  Doina Radulescu.  The Effects of a Bonus Tax on Manager Compensation and Welfare , 2010, SSRN Electronic Journal.

[31]  John B. Taylor.  Monetary Policy Rules , 1999 .

[32]  A Closed-form Solution for a Model of Precautionary Saving , 1993 .

[33]  A. Robson.  Sequential Exploitation of Uncertain Deposits of a Depletable Natural Resource , 1979 .

[34]  S. Carson.  Nineteenth century stature and family size: binding constraint or productive labor force? , 2010, SSRN Electronic Journal.

[35]  Florian Englmaier,et al.  Incentives, Reputation and the Allocation of Authority , 2010, SSRN Electronic Journal.

[36]  Jeffrey M. Davis,et al.  Fiscal Policy Formulation and Implementation in Oil-Producing Countries , 2003 .

[37]  J. Aizenman.  Buffer stocks and precautionary savings with loss aversion , 1998 .

[38]  P. Lane,et al.  Are windfalls a curse?: A non-representative agent model of the current account , 1998 .

[39]  Jan Tuinstra,et al.  Identification of Voters with Interest Groups Improves the Electoral Chances of the Challenger , 2010, Math. Soc. Sci..

[40]  N. Long,et al.  Extracting Several Resource Deposits of Unknown Size: Optimal Order , 2007 .

[41]  F. Ploeg.  Prudent monetary policy and prediction of the output gap , 2009 .

[42]  F. Ploeg.  Political economy of prudent budgetary policy , 2010 .

[43]  James D. Hamilton,et al.  Understanding Crude Oil Prices , 2008 .

[44]  Silvia Rocha-Akis,et al.  Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms , 2010, SSRN Electronic Journal.

[45]  Larry G. Epstein,et al.  Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework , 1989 .

[46]  H. Sinn.  Common Property Resources, Storage Facilities and Ownership Structures: A Cournot Model of the Oil Market , 1984 .

[47]  Glenn C. Loury,et al.  A Theory of 'Oil'igopoly: Cournot Equilibrium in Exhaustible Resource Markets with Fixed Supplies , 1986 .

[48]  Paulo A. Medas,et al.  Managing the Oil Revenue Boom : The Role of Fiscal Institutions , 2008 .

[49]  Kai Leitemo,et al.  Robust Monetary Policy in the New-Keynesian Framework , 2004 .

[50]  Ramesh C. Kumar.  How to eat a cake of unknown size: A reconsideration , 2005 .

[51]  Yacov Tsur,et al.  Endangered aquifers: Groundwater management under threats of catastrophic events , 2004 .

[52]  S. Barnett,et al.  Operational Aspects of Fiscal Policy in Oil-Producing Countries , 2002 .

[53]  Astrid Hopfensitz,et al.  Investment, Resolution of Risk, and the Role of Affect , 2008, Social Science Research Network.

[54]  Seppo Salo,et al.  Oligopoly Equilibria in Nonrenewable Resource Markets , 2001 .

[55]  C. Carroll,et al.  A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds , 2009 .

[56]  C. Teulings,et al.  Is Economic Recovery a Myth? Robust Estimation of Impulse Responses , 2010, SSRN Electronic Journal.

[57]  M. Gemmill,et al.  Does Cost Sharing Really Reduce Inappropriate Prescriptions? , 2010 .

[58]  P. Collier,et al.  Managing Resource Revenues in Developing Economies , 2010 .

[59]  Gunther Markwardt,et al.  Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation? , 2010, SSRN Electronic Journal.

[60]  D. Novy.  International Trade and Monopolistic Competition Without CES: Estimating Translog Gravity , 2010, SSRN Electronic Journal.

[61]  Eric Maskin,et al.  Disadvantageous Oil Tariffs and Dynamic Consistency , 1990 .

[62]  C. Withagen,et al.  Strong Time-Consistency in the Cartel-Versus-Fringe Model , 2003 .

[63]  R. Solow,et al.  Extraction Costs in the Theory of Exhaustible Resources , 1976 .

[64]  Justin Wolfers,et al.  Nber Working Paper Series Explaining the Favorite-longshot Bias: Is It Risk-love or Misperceptions? , 2022 .

[65]  Agnar Sandmo,et al.  The Effect of Uncertainty on Saving Decisions , 1970 .

[66]  Ngo Van Long,et al.  Exhaustible resources, optimality, and trade , 1980 .

[67]  Magnus Söderberg.  Informal Benchmarks as a Source of Regulatory Threat in Unregulated Utility Sectors , 2010, SSRN Electronic Journal.

[68]  Ngo Van Long,et al.  On Two Folk Theorems Concerning the Extraction of Exhaustible Resources , 1980 .

[69]  P. Whittle.  Risk-Sensitive Optimal Control , 1990 .

[70]  H. Leland..  Saving and Uncertainty: The Precautionary Demand for Saving , 1968 .

[71]  R. Pindyck.  The Optimal Exploration and Production of Nonrenewable Resources , 1978, Journal of Political Economy.

[72]  S. Zeldes,et al.  Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence , 1989 .

[73]  L. Karp.  Social Welfare in a Common Property Oligopoly , 1992 .

[74]  James A. Robinson,et al.  White Elephants , 2002 .

[75]  Further generalizations of the cake-eating problem under uncertainty , 1977 .

[76]  Faruk Gul.  A Theory of Disappointment Aversion , 1991 .

[77]  Thomas Stratmann,et al.  Effects of Prenatal and Early Life Malnutrition: Evidence from the Greek Famine , 2010, Journal of health economics.

[78]  Robert S. Pindyck,et al.  The Optimal Production of an Exhaustible Resource When Price is Exogenous and Stochastic , 1981 .

[79]  Antoine Bommier,et al.  Uncertain Lifetime and Intertemporal Choice: Risk Aversion as a Rationale for Time Discounting , 2006 .

[80]  M. Moreaux,et al.  On the Optimal Order of Natural Resource Use When the Capacity of the Inexhaustible Substitute is Limited , 1998 .

[81]  R. Barro.  On the Determination of the Public Debt , 1979, Journal of Political Economy.

[82]  A. Deaton.  Saving and Liquidity Constraints , 1989 .

[83]  D. Sibley.  Permanent and transitory income effects in a model of optimal consumption with wage income uncertainty , 1975 .

[84]  John M. Hartwick,et al.  Intergenerational equity and the investing of rents from exhaustible resources , 2017 .

[85]  Stephen W. Salant,et al.  Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market , 1976, Journal of Political Economy.

[86]  P. Weil.  Precautionary Savings and the Permanent Income Hypothesis , 1993 .

[87]  Toke S. Aidt,et al.  Fiscal Federalism and Electoral Accountability , 2010, SSRN Electronic Journal.

[88]  K. O. Aarbu.  Demand Patterns for Treatment Insurance in Norway , 2010, SSRN Electronic Journal.

[89]  Glenn C. Loury,et al.  The Optimal Exploitation of an Unknown Reserve , 1977 .

[90]  Helmut Rainer,et al.  Family Location and Caregiving Patterns from an International Perspective , 2010, SSRN Electronic Journal.

[91]  R. Gilbert.  Optimal Depletion of an Uncertain Stock , 1979 .

[92]  N. Long.  Resource extraction under the uncertainty about possible nationalization , 1975 .

[93]  H. Hotelling.  The economics of exhaustible resources , 1931, Journal of Political Economy.

[94]  J. Daniel,et al.  Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications , 2001 .