Felix D. Meier (Kiel Institute)
We propose a simple extension of the Hotelling-Herfindahl model of non-renewable resource use that allows us to capture the main technological developments in the U.S. natural gas industry over the last 20 years. Different to existing literature that assumes decreasing extraction costs, we treat technological progress endogenously. The model includes two non- renewable resources, conventional gas and shale gas, a renewable backstop, and endogenous technological change in the shale gas industry. We find that firms start with the production of conventional gas and switch at most two times between shale gas and the renewable backstop. Before shale gas is extracted investments are positive and increasing over time. Once production shifts completely towards shale gas, investments decline. Contrary to the Hotelling-Herfindahl model, production can increase over a period of time and price can follow a U-shaped path. Our Calibration shows that U.S. shale gas production continues to grow up to 30 Tcf, and prices continue to decrease until 2050.
Felix D. Meier (Kiel institute) – Martin F. Quaas (Leipzig University, German Centre for Integrative Biodiversity Research (iDiv) Halle-Jena-Leipzig)
Lecture Hall (A-032)