Comment on: “Optimal dynamic production from a large oil field in Saudi Arabia”

Islam Rizvanoghlu ()

Empirical Economics, 2016, vol. 51, issue 3, No 19, 1288 pages

Abstract: Abstract This paper extends the study by Gao et al. (Empir Econ 37:153–184, 2009), which models the profit-maximizing dynamic oil production from a large oil field in Saudi Arabia by using an engineering model of oil extraction. Although it gives an important insight about the dynamics of oil production by examining and comparing different scenarios for exogenous variables, it assumes perfect knowledge and foresight about the future. However, the production decision might not be based on different scenarios, but rather on different expectations about the future. Therefore, we propose to extend the model by incorporating uncertainty arising from a random arrival date of a new backstop technology that will enable the production of a perfect substitute for oil. We find that the optimal production path has a different dynamic under this new specification that may explain the less aggressive extraction behavior of the producer before 2000, which was concluded to be economically irrational by Gao et al. (2009).

Keywords: Optimal oil production; Dynamic programming; Value function approximation; Backstop technology (search for similar items in EconPapers)
JEL-codes: C30 C61 Q32 Q41 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-1032-x

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