The management of jointly produced exhaustible resources

Abstract

Until recently most contributions dealing with extraction of exhaustible resources have analysed problems related to the management of a single pool of a resource, such as oil. There are, however, many types of resources that are discovered and extracted jointly, like natural gas and oil. Pindyck (1982) discusses optimal management of jointly produced exhaustible resources; the market behaviour for resources that are extracted jointly is analysed, and it is demonstrated how the price of one resource will depend upon the demand and storage cost for the other. Abodunde and Wirl (1985) consider a country (or a resource cartel like OPEC) extracting both oil and natural gas (associated gas and gas from dry basins), and facing downward-sloping demand curves for both resources. They derive an optimal extraction programme and find various combinations of oil and gas extraction. One interesting result is that the country might find if profitable to flare an amount of gas in order to keep the oil price at a desired level. Wirl (1987) has a similar model, with only associated gas, where the main result is that wasting (i.e. flaring the gas) could be optimal from the producer’s point of view, at least over a period of time, to increase the revenue from the other commodity. (Whether flaring will be total or partial is shown by Wirl to depend upon the degree of substitutability in demand.)