Guest Speaker Soren Anderson - Hotelling Under Pressure: Oil Production and Pricing
Please join us for a guest lecture that challenges conventional wisdom on policies for reducing vehicle GHG emissions. Soren Anderson from Michigan State University will present “Overlapping Strategies for Reducing Carbon Emissions from the Personal Transportation Sector,” which analyzes current federal renewable fuel standards, size-based fuel economy standards, and direct taxes on carbon and gasoline, as well as suggested optimal combinations. It finds that the current mix of overlapping policies leads to substantial reductions in greenhouse gas emissions, but also induces behavioral changes that are highly cost-ineffective.
In this paper, we show that oil production from existing wells in Texas does not respond to oil prices, while drilling activity and costs respond strongly. 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, explains why the production constraint typically binds, and rationalizes regional production peaks and observed patterns of prices, drilling, and production following demand and supply shocks.
About Soren Anderson
Soren Anderson is an Associate Professor of Economics and Agricultural, Food, and Resource Economics at Michigan State University. He studies a range of issues in energy and environmental economics, with a focus on markets for automobiles and the fuels they use, including oil, gasoline, and biofuels. He holds a Ph.D. in economics from the University of Michigan and a B.A. in economics from Macalester College. His research has been published in the American Economic Review, Journal of Environmental Economics and Management, and Journal of Industrial Economics. He is appointed as a Research Associate at the National Bureau of Economic Research, and he serves on the Editorial Board at the Journal of Environmental Economics and Management. He previously served as a visiting researcher at the Energy Institute at Haas at UC Berkeley, as a staff economist with the White House Council of Economic Advisers, and as a research assistant at Resources for the Future.