The Efficient Use of Multiple Sources of a Nonrenewable Resource Under Supply Cost Uncertainty

29 Pages Posted: 21 May 2008

See all articles by Gérard Gaudet

Gérard Gaudet

University of Montreal - Department of Economics; Centre Interuniversitaire de Recherche en Economie Quantitative (CIREQ)

Pierre Lasserre

University of Quebec at Montreal (UQAM) - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Angers - Research Group in Quantitative Saving (GREQAM)

Date Written: 2008-03-01

Abstract

Uncertainties as to future supply costs of nonrenewable natural resources, such as oil and gas, raise the issue of the choice of supply sources. In a perfectly deterministic world, an efficient use of multiple sources of supply requires that any given market exhausts the supply it can draw from a low cost source before moving on to a higher cost one; supply sources should be exploited in strict sequence of increasing marginal cost, with a high cost source being left untouched as long as a less costly source is available. We find that this may not be the efficient thing to do in a stochastic world. We show that there exist conditions under which it can be efficient to use a risky supply source in order to conserve a cheaper non risky source. The benefit of doing this comes from the fact that it leaves open the possibility of using it instead of the risky source in the event the latter's future cost conditions suddenly deteriorate. There are also conditions under which it will be efficient to use a more costly non risky source while a less costly risky source is still available. The reason is that this conserves the less costly risky source in order to use it in the event of a possible future drop in its cost.

Keywords: Security of supply, uncertainty, nonrenewable resources, order of use

JEL Classification: Q31, D81, D90

Suggested Citation

Gaudet, Gérard and Lasserre, Pierre, The Efficient Use of Multiple Sources of a Nonrenewable Resource Under Supply Cost Uncertainty (2008-03-01). CIRANO - Scientific Publication, 2008, Available at SSRN: https://ssrn.com/abstract=1106311

Gérard Gaudet (Contact Author)

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://sceco.umontreal.ca/repertoire-departement/vue/gaudet-gerard-1/

Centre Interuniversitaire de Recherche en Economie Quantitative (CIREQ) ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://www.cireqmontreal.com

Pierre Lasserre

University of Quebec at Montreal (UQAM) - Department of Economics

Center for Interuniversity Research and Analysis on Organization (CIRANO)

University of Angers - Research Group in Quantitative Saving (GREQAM)

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