On the timing of non-renewable resource extraction with regime switching prices: an optimal stochastic control approach

Margaret Insley

No 1302, Working Papers from University of Waterloo, Department of Economics

Abstract: This paper develops a model of a profit maximizing firm with the option to exploit a non-renewable resource, choosing the timing and pace of development. The resource price is modelled as a regime switching process, which is calibrated to oil futures prices. A Hamilton-Jacobi-Bellman equation is specified that describes the profit maximization decision of the firm. The model is applied to a problem of optimal investment in a typical oils sands in situ operation, and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction, as well to operate, mothball or abandon the facility. The paper focuses on the impact of regime shifts on the optimal timing of investment and extraction compared with the case when the possibility of future regime shifts is ignored.

JEL-codes: C61 C63 Q30 Q40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-08, Revised 2013-08
New Economics Papers: this item is included in nep-ene and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wat:wpaper:1302

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