A model of optimal dynamic oil extraction: Evidence from a large Middle Eastern field

We model the economically optimal dynamic oil production decisions of a rep resentative country whose oil fields resemble the largest developed oil fie ld in Saudi Arabia, Ghawar. A government-controlled enterprise may base its oil production decisions on criteria other than maximization of the presen t discounted value of profits. In particular, oil production decisions are likely to reflect many political, strategic and geopolitical motives of the government. Our analysis of the optimal economic decisions nevertheless en ables one to assess the extent to which long-run value maximization is bein g followed. This in turn allows one to judge the costs that political decis ions are imposing in terms of foregone economic output, government revenue and foreign exchange. These costs ought to be of interest to policy-makers within Saudi-Arabia and also to external parties interested in modifying Sa udi pricing and production decisions.