NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hotelling Under Pressure

Soren T. Anderson, Ryan Kellogg, Stephen W. Salant

NBER Working Paper No. 20280
Issued in July 2014
NBER Program(s):   EEE   IO

We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs and explains why production is typically constrained. It also rationalizes regional production peaks and observed patterns of price expectations following demand shocks.

A non-technical summary of this paper is available in the December 2014 NBER digest.  You can sign up to receive the NBER Digest by email.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20280

Users who downloaded this paper also downloaded these:
Kroft, Lange, Notowidigdo, and Katz w20273 Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation
Gertler and Karadi w20224 Monetary Policy Surprises, Credit Costs and Economic Activity
Rodrik w20188 An African Growth Miracle?
La Porta and Shleifer w20205 Informality and Development
Suarez Serrato and Zidar w20289 Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us