Natural Resources Research

, Volume 18, Issue 1, pp 19–28 | Cite as

Insights from a Simple Hotelling Model of the World Oil Market



This paper uses annual data on world oil price and consumption from 1965 to 2006 to calibrate a Hotelling model of optimal nonrenewable resource extraction. Numerical solutions are generated for various specifications of the elasticity of demand for both isoelastic demand and linear demand under each of two possible market structures: perfect competition and monopoly. Prior to the 1973 oil crisis, the model that best fits actual data is one of perfect competition with linear demand and a demand elasticity of −0.4. For the periods 1973–1981 and 1981–1990, the model that best fits actual data is one of monopoly with linear demand and demand elasticities of −0.8 and −0.7, respectively, suggesting that the market was strongly influenced by OPEC during this time. Under the model that best fits the most recent period (perfect competition with linear demand and demand elasticity −0.5), the real oil price (in 1982–1984 U.S.$) should fall in the range $60.87–$66.31/barrel over the years 2010–2030.


Nonrenewable resource extraction stock effects market structure demand elasticity 



I thank Gary Chamberlain, Jon Conrad, William Hogan, Nancy Stokey, George Richardson, James Smith, Howard Stone, and Martin Weitzman for helpful comments and discussions. The time series data used in this study were acquired with the help of Brian Greene and with funds from the Littauer Library at Harvard University. I received financial support from an EPA Science to Achieve Results graduate fellowship, a National Science Foundation graduate research fellowship, and a Repsol YPF—Harvard Kennedy School Pre-Doctoral Fellowship in energy policy. All errors are my own.


  1. Adelman, M. A., 1992, Finding and developing costs in the United States, 1945–1986, in Moroney, J. R., ed., Advances in the Economics of Energy and Resources—Energy, Growth and the Environment, v. 7: Greenwich, Conn., JAI Press Inc., p. 11–58.Google Scholar
  2. Berndt, E.R., Wood, D.O., 1975. Technology, prices, and the derived demand for energy. The Review of Economics and Statistics 57(3), 259–268.CrossRefGoogle Scholar
  3. Chakravorty, U., Roumasset, J., and Tse, K., 1997. Endogenous substitution among energy resources and global warming. J. Polit. Econ. 105(6), 1201–1234.CrossRefGoogle Scholar
  4. Chapman, D., 1993. World oil: Hotelling depletion or accelerating use? Nat. Resour. Res., 2 (4), 331–339.CrossRefGoogle Scholar
  5. Chapman, D., and Khanna, N., 2000. World oil: The growing case for international policy. Contemporary Economic Policy, 18 (1), 1–13.CrossRefGoogle Scholar
  6. Cremer, J., Salehi-Isfahani, D., 1991. Models of the oil market. Harwood Academic Publishers, New York.Google Scholar
  7. Cremer, J., and Weitzman, M.L. 1976. OPEC and the monopoly price of world oil. Eur. Econ. Rev. 8, 155–164.CrossRefGoogle Scholar
  8. Dahl, C.A., 1993. A survey of oil demand elasticities for developing countries. OPEC Review XVII (4), 399–419.CrossRefGoogle Scholar
  9. Dahl, C.A., 1994a. A survey of oil product demand elasticities for developing countries. OPEC Review XVIII(1), 47–87.CrossRefGoogle Scholar
  10. Dahl, C.A., 1994b. A survey of energy demand elasticities for the developing world. Journal of Energy and Development 18(I), 1–48.Google Scholar
  11. Devarajan, S., Fisher, A.C., 1982. Exploration and scarcity. J. Polit. Econ. 90(6), 1279–1290.CrossRefGoogle Scholar
  12. Edmonson, N., 1975. Real price and the consumption of mineral energy in the United States, 1901–1968. The Journal of Industrial Economics 23(3), 161–174.CrossRefGoogle Scholar
  13. Farrow, S., 1985. Testing the efficiency of extraction from a stock resource. J. Polit. Econ. 93(3), 452–487.CrossRefGoogle Scholar
  14. Farzin, Y.H., 1992. The time path of scarcity rent in the theory of exhaustible resources. Economic Journal 102, 841–851.CrossRefGoogle Scholar
  15. Farzin, Y.H., 1995. Technological change and the dynamics of resource scarcity measures. Journal of Environmental Economics and Management 29, 105–120.CrossRefGoogle Scholar
  16. Gately, D., 1984. A ten-year retrospective: OPEC and the world oil market. J. Econ. Lit. 22(3), 1100–1114.Google Scholar
  17. Griffin, J.M. 1985. OPEC behavior: A test of alternative hypotheses. Am. Econ. Rev. 75 (5), 954–963.Google Scholar
  18. Halvorsen, R., Smith, T.R., 1984. On measuring natural resource scarcity. J. Polit. Econ. 92(5), 954–964.CrossRefGoogle Scholar
  19. Halvorsen, R., Smith, T.R., 1991. A test of the theory of exhaustible resources. The Quarterly Journal of Economics 106(1), 123–140.CrossRefGoogle Scholar
  20. Hanson, D.A., 1980. Increasing extraction costs and resource prices: Some further results. The Bell Journal of Economics 11(1), 335–342CrossRefGoogle Scholar
  21. Hnyilicza, E. and Pindyck, R.S. 1976. Pricing policies for a two-part exhaustible resource cartel: The case of OPEC. Eur. Econ. Rev. 8, 139-154.CrossRefGoogle Scholar
  22. Hoel, M., 1978. Resource extraction, uncertainty, and learning. Bell J. Econ. 9(2), 642–645.CrossRefGoogle Scholar
  23. Hotelling, H., 1931. The economics of exhaustible resources. J. Polit. Econ. 39(2), 137–175.CrossRefGoogle Scholar
  24. Hughes, J., Knittel, C., and Sperling, D., 2008. Evidence of a shift in the short-run price elasticity of gasoline demand. Energy Journal 29(1), 93–114.Google Scholar
  25. Huntington, H., 1994. Oil price forecasting in the 1980s: What went wrong? Energy Journal 15(2), 1–22.Google Scholar
  26. Khalatbari, F., 1977. Market imperfections and the optimum rate of depletion of natural resources. Economica 44(176), 409–414.CrossRefGoogle Scholar
  27. Krautkraemer, J.A., 1998. Nonrenewable resource scarcity. J. Econ. Lit. 36(4), 2065–2107.Google Scholar
  28. Lasserre, P., 1985. Discovery costs as a measure of rent. The Canadian Journal of Economics 18(3), 474–483.CrossRefGoogle Scholar
  29. Lin, C.-Y. C, 2005, Optimal world oil extraction: calibrating and simulating the Hotelling model, in Hogan, W. W., ed., Repsol YPF—Harvard Kennedy School Fellows 2003–2004 Research Papers, John F. Kennedy School of Government, Harvard University, Cambridge, p. 251–266. URL:
  30. Lin, C.-Y. C., 2008a, An empirical dynamic model of OPEC and Non-OPEC. Working paper: University of California at Davis.Google Scholar
  31. Lin, C.-Y. C., 2008b, Estimating supply and demand in the world oil market. Working paper: University of California at Davis.Google Scholar
  32. Lin, C.-Y. C., Meng, H., Ngai, T. Y., Oscherov, V., and Zhu, Y. H., 2008, Hotelling revisited: oil prices and endogenous technological progress. Working paper: University of California at Davis.Google Scholar
  33. Lin, C.-Y.C. &Wagner, G., 2007. Steady-state growth in a Hotelling model of resource extraction. Journal of Environmental Economics and Management, 54, 68–83.CrossRefGoogle Scholar
  34. Marcel, V., and Mitchell, J. 2006. Oil titans: National oil companies in the Middle East. Washington, DC: Brookings Institution Press.Google Scholar
  35. Miller, M.H., Upton, C.W., 1985. A test of the Hotelling valuation principle. J. Polit. Econ. 93(1), 1–25.CrossRefGoogle Scholar
  36. Moazzami, B., Anderson, F.J., 1994. Modelling natural resource scarcity using the “error-correction” approach. Canadian Journal of Economics, 27 (4), 801–12.CrossRefGoogle Scholar
  37. Nordhaus, W.D., 1980. Oil and economic performance in industrial countries. Brookings Papers on Economic Activity 1980(2), 341–399.CrossRefGoogle Scholar
  38. Organization of the Petroleum Exporting Countries [OPEC], 2007, OPEC Brief History [Online: web], Cited 9 November 2007. URL:
  39. Pesaran, M.H. 1990. An econometric analysis of exploration and extraction of oil in the U.K. Continental Shelf. The Economic Journal 100 (401), 367–390.CrossRefGoogle Scholar
  40. Pindyck, R. S., 1976, Gains to producers from the cartelization of exhaustible resources. MIT Energy Lab working paper (No. MIT-EL 76-012WP).Google Scholar
  41. Pindyck, R.S., 1978. The optimal exploration and production of nonrenewable resources. J. Polit. Econ. 86(5), 841–861.CrossRefGoogle Scholar
  42. Pindyck, R.S., 1980. Uncertainty and exhaustible resource markets. J. Polit. Econ. 88(6), 1203–1225.CrossRefGoogle Scholar
  43. Salant, S.W., 1976. Exhaustible resources and industrial structure: A Nash-Cournot approach to the world oil market. J. Polit. Econ., 84 (5), 1079–1094.CrossRefGoogle Scholar
  44. Slade, M.E, 1982. Trends in natural resource commodity prices: An analysis of the time domain. Journal of Environmental Economics and Management, 9 (2), 122–137.CrossRefGoogle Scholar
  45. Solow, R.M., Wan, F.Y., 1976. Extraction costs in the theory of exhaustible resources. Bell J. Econ. 7(2), 359–370.CrossRefGoogle Scholar
  46. Sperling, D., and Gordon, D., 2007, Two billion cars. Book manuscript: University of California at Davis.Google Scholar
  47. Stiglitz, J.E., 1976. Monopoly and the rate of extraction of exhaustible resources. Am. Econ. Rev. 66(4), 655–661.Google Scholar
  48. Sweeney, J.L., 1977. Economics of depletable resources: Market forces and intertemporal bias. The Review of Economic Studies 44(1), 124–141.Google Scholar
  49. Ulph, A.M., and Folie, G.M. 1980. Exhaustible resources and cartels: An intertemporal Nash-Cournot model. The Canadian Journal of Economics, 13 (4), 645–658.CrossRefGoogle Scholar
  50. U.S. Geological Survey [USGS], 2004, United States Energy and World Energy Production and Consumption Statistics [Online: web], Cited 7 April 2004. URL:
  51. Watkins, G.C., 1992. The Hotelling Principle: Autobahn or cul de sac? The Energy Journal 13 (1), 1–24.Google Scholar
  52. Weitzman, M.L., 2003. Income, Wealth, and the Maximum Principle. Harvard University Press, Cambridge, MA.Google Scholar
  53. Yergin, D., 1992. The Prize: The Epic Quest for Oil, Money, and Power. Free Press, New York.Google Scholar
  54. Young, D., 1992. Cost specification and firm behaviour in a Hotelling model of resource extraction. The Canadian Journal of Economics 25(1), 41–59.CrossRefGoogle Scholar
  55. Zimmermann, E.W., 1951. World Resources and Industries: A Functional Appraisal of the Availability of Agricultural and Industrial Materials. Harper and Brothers, Publishers, New York.Google Scholar

Copyright information

© International Association for Mathematical Geology 2008

Authors and Affiliations

  1. 1.Agricultural & Resource EconomicsUniversity of California at DavisDavisUSA

Personalised recommendations