A Model of Optimal Dynamic Oil Extraction: Evidence From a Large Middle Eastern Field

Authors: Sickles R.C.; Hartley P.

Source: Journal of Productivity Analysis, Volume 15, Number 1, January 2001 , pp. 59-71(13)

Publisher: Springer

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Abstract:

We model the economically optimal dynamic oil production decisions of a representative country whose oil fields resemble the largest developed oil field in Saudi Arabia, Ghawar. A government-controlled enterprise may base its oil production decisions on criteria other than maximization of the present discounted value of profits. In particular, oil production decisions are likely to reflect many political, strategic and geopolitical motives of the government. Our analysis of the optimal economic decisions nevertheless enables one to assess the extent to which long-run value maximization is being followed. This in turn allows one to judge the costs that political decisions are imposing in terms of foregone economic output, government revenue and foreign exchange. These costs ought to be of interest to policy-makers within Saudi-Arabia and also to external parties interested in modifying Saudi pricing and production decisions.

Keywords: Dynamic structural model; world oil markets; engineering production functions; simulation

Language: English

Document Type: Regular paper

Affiliations: 1: Department of Economics, Rice University, Houston, Texas 77005-1892

Publication date: 2001-01-01