Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question One. In 2 0 1 2 , according to the U . S . Energy Information Administration ( EIA ) world known estimated reserves
Question One. In according to the US Energy Information Administration EIA world known estimated reserves of oil ie the stock of oil S were roughly billion barrels. In that same year, annual world consumptionextraction of oil R was roughly billion barrels according to the International Energy Agency IEA Assume that all of the oil that is extracted R in a year is also consumed, so we can use the terms extraction and consumption interchangeably. Assume that world oil consumption ie extraction grows at a steady rate of through time in the future. Calculate the exponential exhaustion index for oil given current world oil market trends?
Question Two. For this question, use the same estimate of world reserves of oil, billion barrels, that was used in the first question. Also, use the same estimate of annual world consumption of oil, billion barrels in as in Question One. Assume that the world oil price, Brent crude, averaged roughly $barrel during according to the US EIA Suppose that the long run price elasticity of demand for oil is Also, assume that all of the oil that is extracted R in a year is also consumed, so we can use the terms extraction and consumption interchangeably. Assume an optimal extraction rate based upon a discount rate. Based you calculations on the following demand curve for oil, PR which has the following functional form:
PR KeaR
where the demand for oil is determined by:
the quantity of oil extracted ie consumed R
the parameter, K the choke price of oil
and a parameter, a
Given this information:
What is the choke price for oil K
What is the optimal year that the world should exhaust ierun out of oil T
What is the optimal level of consumption ie extraction of oil R in ie is considered the initial year
What is the optimal price of oil P in the initial year of consumptionextraction
Question Three. Why do you think that the exponential exhaustion index and the optimal depletion methodology come up with such different answers about when the world runs out of oil? Suppose that oil supply was added into the optimal depletion model, how do think that this would affect the answers you just derived?
Note: One omission in this analysis is that we have not factored in the environmental damage associated with oil use, so the term optimal should be considered only from a private standpoint. We are not taking a social perspective in this example.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started