A Microeconometric Test of the Theory of Exhaustible Resources

Abstract This paper generalizes extant developments of the economic theory of exhaustible resource production, derives and extends a Halvorsen and Smith (1991, Quarterly Journal of Economics,106, 123–140) type test of the theory, and applies the test to a sample of natural gas resources. To facilitate our empirical test, we extend the model developed in Chermak and Patrick (1995, Journal of Environmental Economics and Management, 28, 174–189) to explicitly account for the fact that the extracted resource (gross product) must be processed to obtain the final (saleable) product. Duality theory is used to derive econometric models with which the theory is statistically tested, using panel data from 29 natural gas wells. Shadow prices of the resource stock through time, which are generally unobservable but necessary for the test, are estimated via the indirect cost function. Contrary to the extant literature, we find, inter alia, that (i) at any point in time, ceteris paribus, the in situ resource price (a) decreases with gross production and (b) increases with final production, and (ii) we cannot reject the theory of exhaustible resources, i.e., producer behavior is consistent with the theory.

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