A microeconometric test of the theory of exhaustible resources

This paper generalizes extant developments of the economic theory of exhaus tible resource production, derives and extends a Halvorsen and Smith (1991. Quarterly Journal of Economics. 106, 123-140) type test of the theory, and applies the test to a sample of natural gas resources. To facilitate our e mpirical test. we extend the model developed in Chermak and Patrick (1995. Journal of Environmental Economics and Management 28. 174-189) to explicitl y account for the fact that the extracted resource (gross product) must be processed to obtain the final (saleable) product. Duality theory is used to derive econometric models with which the theory is statistically tested, u sing panel data from 29 natural gas wells. Shadow prices of the resource st ock through time, which are generally unobservable but necessary for the te st, are estimated via the indirect cost function. Contrary to the extant li terature. we find, inter alia, that (i) at any point in time, ceteris parib us, the in situ resource price (a) decreases with gross production and (b) increases with final production, and (ii) we cannot reject the theory of ex haustible resources, i.e., producer behavior is consistent with the theory. (C) 2001 Academic Press.