The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty
Gérard Gaudet () and
Cahiers de recherche from Centre interuniversitaire de recherche en Ã©conomie quantitative, CIREQ
Uncertainties as to future supply costs of nonrenewable natural resources, such as oil and gas, raise the issue of the choice of supply sources. In a perfectly deterministic world, an efficient use of multiple sources of supply requires that any given market exhausts the supply it can draw from a low cost source before moving on to a higher cost one, supply sources should be exploited in strict sequence of increasing marginal cost, with a high cost source being left untouched as long as a less costly source is available. We find that this may not be the efficient thing to do in a stochastic world. We show that there exist conditions under which it can be efficient to use a risky supply source in order to conserve a cheaper non risky source. The benefit of doing this comes from the fact that it leaves open the possibility of using it instead of the risky source in the event the latter’s future cost conditions suddenly deteriorate. There are also conditions under which it will be efficient to use a more costly non risky source while a less costly risky source is still available. The reason is that this conserves the less costly risky source in order to use it in the event of a possible future drop in its cost.
Keywords: Security of suly; Uncertainty; Nonrenewable resources; Order of use (search for similar items in EconPapers)
JEL-codes: D81 D90 Q31 (search for similar items in EconPapers)
Pages: 28 pages
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Journal Article: THE EFFICIENT USE OF MULTIPLE SOURCES OF A NONRENEWABLE RESOURCE UNDER SUPPLY COST UNCERTAINTY (2011)
Working Paper: The Efficient Use of Multiple Sources of a Nonrenewable Resource Under Supply Cost Uncertainty (2008)
Working Paper: The Efficient Use of Multiple Sources of a Nonrenewable Resource under Supply Cost Uncertainty (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:04-2008
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