The Optimal Exploration and Production of Nonrenewable Resources

Optimal Exploration and Production of a Nonrenewable Resource Earlier studies of exhaustible resource production and pricing usually assume that there is a fixed reserve base that can be exploited over time. In reality there is no fixed reserve base (in an economically meaningful sense), since as price rises, additional proved and potential reserves become economical. Here we view a resource like oil as being nonrenewable rather than exhaustible. There is a proved reserve base which is the basis for production, and exploratory activity is the means of increasing or maintaining this proved reserve base. Potential reserves are unlimited, but as depletion ensues, given amounts of ex-ploratory activity result in ever-smaller discoveries. Thus resource producers must determine simultaneously their optimal rate of exploratory activity and their optimal rate of production. Optimal trajectories for exploratory activity and production are determined for both competitive and monopolistic producers, and are applied to a simple model of oil production in the Permian region of Texas.