Suggested Citation:
Lin Lawell, C.-Y. Cynthia (2009) Insights from a Simple Hotelling Model of the World Oil Market. Natural Resources Research 18 (1), 19 - 28

This paper uses annual data on world oil price and consumption from 1965 to 2006 to calibrate a Hotelling model of optimal nonrenewable resource extraction. Numerical solutions are generated for various specifications of the elasticity of demand for both isoelastic demand and linear demand under each of two possible market structures: perfect competition and monopoly. Prior to the 1973 oil crisis, the model that best fits actual data is one of perfect competition with linear demand and a demand elasticity of -0.4. For the periods 1973–1981 and 1981–1990, the model that best fits actual data is one of monopoly with linear demand and demand elasticities of -0.8 and -0.7, respectively, suggesting that the market was strongly influenced by OPEC during this time. Under the model that best fits the most recent period (perfect competition with linear demand and demand elasticity -0.5), the real oil price (in 1982–1984 U.S.$) should fall in the range $60.87–$66.31/barrel over the years 2010–2030.

Keywords: nonrenewable resource extraction, stock effects, market structure, demand elasticity