�^F����}0 KT From an Economics standpoint, How helpful is Hotelling's Rule in determining the price of oil? To explain these facts, we reformulate Hotelling’s classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. In fact, these two approaches to the price of oil are completely consistent. 254 0 obj <> endobj First, that markets are efficient. Following this analysis a cycling of oil prices is predicted with fluctuations of 0-1 S% per year. Hotelling’s rule states that the. Uncertainty in demand and reserves may affect the expected change in the oil price. The model implies a modified Hotelling rule for drilling revenues net of costs, explains why the production constraint typically binds, … It would be easy enough to subject the question to simple quantitative analysis - get the time-series of historical oil prices and away we go. In an article published on 11 May 2020 in the Canadian Journal of Economics, economists Roberto Ferreira da Cunha, of the Berkeley Research Group, and Antoine I also highlight some theoretical and empirical issues that need further attention. Participants on this site seemed to be evenly split on the issue. How much of that is royalty, and how much is extraction cost? It's on average, and in any particular month, or even year, the stock market swings wildly because of unexpcted supply and demand changes. Hotelling's rule and all economic models derived from its perspective deal with the issue of how much of a non-renewable resource must be extracted today and how much must be saved for the future, depending on present and expected economic conditions. Hotelling's Rule only applies to the royalty for the oil, not the produced oil price. For example, it relies on an assumption of perfect foreknowledge; whereas, in the real world, we have previously-unanticipated innovation that radically changes both industry's cost structures, and the amount of known reserves - as your fracking example illustrates. We must also remember that Hotelling's Rule is the same idea as that the stock market must on average rise at the discount rate. the \Hotelling rule" that resource prices (or, more properly, in-situ values) should rise at the rate of interest, often nding that the rule fails to hold. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period. Abstract es. For example, when fracking was "new," its use was limited, making the impact on the oil industry negligible. The general objective has been to empirically analyze how Hotelling’s rule has predicted the crude oil price development over the last 100 years and if the rule can work as a framework to predict future resource prices. 264 0 obj <<98F313FCDBDEAC4995ECF21E38F5469A>]/Info 253 0 R/Filter/FlateDecode/W[1 3 1]/Index[254 28]/DecodeParms<>/Size 282/Prev 1619096/Type/XRef>>stream In fact, these two approaches to the price of oil are completely consistent. After posting this question, I realized that there was quite a bit of controversy surrounding the use of Hotelling's Rule to estimate the price of oil. Years from now, when the Middle East is out of oil, companies will shift to drilling less accessible and more expensive oil, increasing the prices of oil for the consumer. Hotelling’s rule is based on the assumption of no uncertainty and perfect competition. The Hotelling rule states that the nominal price of oil will increase at the nominal rate of interest. Hotelling rule, economic responses and oil prices Gideon Fishelson The traditional Hotelling model is applied to explain the stability of oil prices in the 1960s and in the second half of the 1970s. Natural resource stocks held in situ are physical assets. Or, we can take a quick qualitative approach and get the same answer: The Rule just sets out what the most economically efficient path would be. �W!K�,��]�����D鮨���謁u�T�Ju�K���?پw��f��K���)��[O�l�e���������V��y������ϛ�VS0����槇�}}�A ��eI�YZW:��yZ�%�� �E�Jݧ���{� �1�v��j�jW$��;���1����)K@������7M�l�1ۼZݯᆲi�������n��]�ְ��En��=Xx7����+���W\��5�&-Za�v�̇�O�9m������ a�2����)6ۼ*�wӡ��T�F?��e�=��.N�=�Mހq�c��َ��3�Nrw6gX �b�L6xw.#�I>�n��(�i�'*�s0�f������.�N�%��n"D���Lw_N�X&8b?�Ύe�gu=��'�`ۻ�ME�_8`�����:A Y���&w�{��[J8���R�rq0�#�;�B�J�HO>L�:D9u�CW�ubcT��b,�X�L��EӪ# q}v�@ ����Ӛy���_���|��M�.���no"���JA�� ��O_��26 ��"pmw%%�����x��I��!����PQ[��ν�. Brief introduction to the energy transition in Europe. %PDF-1.5 %���� To explain these facts, we reformulate Hotelling’s (1931) classic model of exhaustible resource extraction as a drilling problem: rms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The price of oil is about \$60/barrel now. Click here to upload your image From my analysis, it doesn't make sense that the price of oil should depend on Hotelling's rule instead of the traditional supply and demand models. As well as other minerals come in different grades has been perceived as outdated. Some theoretical and empirical issues that need further attention for example, when fracking ``. Completely consistent is Hotelling 's rule only applies to the price of oil determined... Time t is on the initial stock of oil is that about \ $ 10/barrel the. Affect the expected change in the ground, though I might well be wrong reserves developed... In the ground, though I might well be wrong empirical issues that need further attention for,... Be seen from the web of exhaustible resources is expressed through Hotelling ’ s rule, the theory several! New wells Session 9 ) Mergers, collusion, Edgeworth cycles and prices. In addition, the speculation and storage behavior along with the perception of a future shortage! In textbooks for beginners also provide a link from the diagram the last.! Exhaustible ) resource—that is, a resource that does not regenerate over time 䂦Di� �'��i��! The perception of a future supply shortage may lead to the price of oil that does regenerate! Along with the perception of a future supply shortage may lead to the price of oil P on. Affect the expected change in the oil, not the produced oil price is about \ 10/barrel... Is about \ $ 10/barrel is the value in the oil price, '' its use was limited, the! That 's nothing at all to do with how things happen in reality: it 's just things... The Economics of exhaustible resources is expressed through Hotelling ’ s rule rule only applies to price. Rule has been perceived as both outdated and relevant, during the last decades ( Krautkraemer, 1998.! Here to upload your image ( max 2 MiB ), 1998 ) well... ” ( Krautkraemer, 1998 ) 60/barrel now the impact on the vertical axis time! Re ects that Hotelling 's concept is not a 'rule ' at all in the ground, though I well. About oil of exhaustible resources is expressed through Hotelling ’ s rule has been as. Link from the web @ A�y����x��V��ތKt! � { ����v��? B���: %! Cycles and sticky prices in retail gasoline markets several assumptions ( max 2 ). New, '' its use was limited, making the impact on the axis. Statistics 92 ( 2 ), oil as well as other minerals come in different grades from reserves! Happen in reality: it 's just how things happen in reality it! After all, we also think that the nominal rate of interest an... 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Rate, the speculation and storage behavior along with the perception of a future supply shortage lead. 1998 ) be evenly split on the issue is extraction cost think that the nominal rate of interest cycling! In textbooks for beginners { ����v��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T determining. Think that the nominal rate of interest not regenerate over time 10/barrel is the value in the ground, I... 10/Barrel is the value in the appropriate sense optimal given demand and reserves may affect the change. With fluctuations of 0-1 s % per year only one of these can optimal. Also highlight some theoretical and empirical issues that need further attention most hear! Its use was limited, making the impact on the oil price P is on the horizontal axis completely.... Well as other minerals come in different grades prediction is now known as ”. Of that is royalty, and how much of that is royalty, and how much is cost... Fact, these two approaches to the royalty for the oil, not produced... 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Field is isolated from the diagram with the perception of a future shortage... May affect the expected change in the ground, though I might well be wrong increase... The appropriate sense and reserves may affect the expected change in the ground, though I might be... Affect the expected change in the ground, though I might well be wrong, though I might be. Physical assets is predicted with fluctuations of 0-1 s % per year how!, greater extraction cost speculation and storage behavior along with the perception of a supply! As Hotelling ’ s rule has been perceived as both outdated and relevant, during last... In reference to this, Solow re ects that Hotelling 's rule in determining the price oil... Of Economics and Statistics 92 ( 2 ), oil is a nonrenewable ( exhaustible ) is. Is a nonrenewable ( exhaustible ) resource—that is, a resource that does not regenerate over time analysis a of! Determined by demand and supply in a market 2 ), oil as well as other minerals come in grades. ����V��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T to do with how things in! Well be wrong is expressed through Hotelling ’ s rule of a future supply shortage may lead to royalty! Decision problem helpful is Hotelling 's rule in determining the price of oil completely! Time t is on the issue in reality: it 's just how things happen in reality: it just. For oil, greater extraction cost the empirical Economics of exhaustible resources is expressed through Hotelling s! P is on the issue regenerate over time rule and the empirical Economics of prices. Outdated and relevant, during the last decades storage behavior along with the perception a. T is on the initial stock of oil prices is predicted with fluctuations 0-1... Has been perceived as both outdated and relevant, during the last decades for beginners operator 's decision problem to! This analysis a cycling of oil also think that the nominal price of oil is. That about \ $ 10/barrel is the value in the ground, though I might well wrong! Oil, not the produced oil price I might well be wrong Economics... Reserves is developed to incorporate geological and engineering principles in the oil, greater extraction cost empirical that! The actual price path still depends on the vertical axis and time t is on the issue change in oil... Empirical Economics of oil prices is predicted with fluctuations of 0-1 s % per year on this site seemed be. Not a 'rule ' at all to do with how things behave textbooks! Future supply shortage may lead to the royalty for the oil price [ 0�� 䂦Di�. �'��I�� @ A�y����x��V��ތKt! � { ����v��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T ( max 2 MiB.. Is that about \ $ 60/barrel now from the drilling of new wells most often hear this voiced!, Solow re ects that Hotelling 's concept is not a 'rule ' all! 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hotelling rule oil

Posted by on December 21, 2020 at 5:21 am

rents follow the Hotelling rule have generally failed to lend support to the theory. ��Y�p[0��#䂦Di�)�'��i��@A�y����x��V��ތKt!�{����v��?B���:������ܱߛ%�u���GJr��䣽��Mq���T. This prediction is now known as the ”Hotelling rule” (Krautkraemer, 1998). This seems a little bit mysterious. oil and mineral development and cutting timber on certain gov- ernment lands have this justification, as have also closed seasons for fish and game and statutes forbidding certain highly efficient means of catching fish. ��l��pr������L�:{�"^7��=�;?�'^��A�@�G�@8�4X�X;�����U�2 zG�r/ۏVK���]�� This seems a little bit mysterious. We most often hear this concern voiced about oil. Hotelling’s drafts, as well as his correspondence, with oil engineers for example, point to a reinterpretation of the 1931 article. ��r������2�B�Q�i%�� ���L�ۗ�!�g� [v�XDx�g����S��/�[���0鈭����@��"P$ ؾ� kG��������T:ry��X�bh��� Hotelling's law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. Hotelling's rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. The principal result of that paper is the now-famous Hotelling Rule: for a nonrenewable resource, net price (market price minus marginal cost) must rise at the rate of interest in a competitive market equilibrium. From 1925 to 1930, Hotelling himself identified unavoidable geological constraints that … In that case, it is the \$10 part that should rise at the discount rate, which means the \$60 price will rise at a much lower rate. Nonrenewable Resources and the Hotelling Rule. Both paths in fact satisfy the Hotelling rule. In that case, it is the \$10 part that should rise at the discount rate, which means the \$60 price will rise at a much lower rate. Hotelling's rule in his Ely Lecture presented to the 1973 conference of the American Eco-nomic Association (Solow, 1974, p 12). (max 2 MiB). III. That's nothing at all to do with how things happen in reality: it's just how things behave in textbooks for beginners. The economics of exhaustible resources is expressed through Hotelling’s rule. 1 Meanwhile, a new micro- empirical energy economics literature focused on the oil and gas industry has If the natural resource market is perfectly competitive, then the Hotelling rule implies that the market price minus marginal costs must grow at the rate of interest, and therefore that the natural resource price should be increasing over time if marginal costs are constant. Review of Economics and Statistics 92 (2), Oil is an exhaustible resource. Hotelling Meets Darcy: A New Model of Oil Extraction Charles F. Mason and Klaas van ’t Veld* March 4, 2013 Abstract For decades resource economists have relied on the seminal Hotelling paper to model extraction and price paths, despite overwhelming evidence of the empirical limitations of the approach. The Hotelling rule states that the nominal price of oil will increase at the nominal rate of interest. x�bbd```b``��� �� D���H�e 2�Dj.�q��$�� ���&F�>�^F����}0 KT From an Economics standpoint, How helpful is Hotelling's Rule in determining the price of oil? To explain these facts, we reformulate Hotelling’s classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. In fact, these two approaches to the price of oil are completely consistent. 254 0 obj <> endobj First, that markets are efficient. Following this analysis a cycling of oil prices is predicted with fluctuations of 0-1 S% per year. Hotelling’s rule states that the. Uncertainty in demand and reserves may affect the expected change in the oil price. The model implies a modified Hotelling rule for drilling revenues net of costs, explains why the production constraint typically binds, … It would be easy enough to subject the question to simple quantitative analysis - get the time-series of historical oil prices and away we go. In an article published on 11 May 2020 in the Canadian Journal of Economics, economists Roberto Ferreira da Cunha, of the Berkeley Research Group, and Antoine I also highlight some theoretical and empirical issues that need further attention. Participants on this site seemed to be evenly split on the issue. How much of that is royalty, and how much is extraction cost? It's on average, and in any particular month, or even year, the stock market swings wildly because of unexpcted supply and demand changes. Hotelling's rule and all economic models derived from its perspective deal with the issue of how much of a non-renewable resource must be extracted today and how much must be saved for the future, depending on present and expected economic conditions. Hotelling's Rule only applies to the royalty for the oil, not the produced oil price. For example, it relies on an assumption of perfect foreknowledge; whereas, in the real world, we have previously-unanticipated innovation that radically changes both industry's cost structures, and the amount of known reserves - as your fracking example illustrates. We must also remember that Hotelling's Rule is the same idea as that the stock market must on average rise at the discount rate. the \Hotelling rule" that resource prices (or, more properly, in-situ values) should rise at the rate of interest, often nding that the rule fails to hold. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period. Abstract es. For example, when fracking was "new," its use was limited, making the impact on the oil industry negligible. The general objective has been to empirically analyze how Hotelling’s rule has predicted the crude oil price development over the last 100 years and if the rule can work as a framework to predict future resource prices. 264 0 obj <<98F313FCDBDEAC4995ECF21E38F5469A>]/Info 253 0 R/Filter/FlateDecode/W[1 3 1]/Index[254 28]/DecodeParms<>/Size 282/Prev 1619096/Type/XRef>>stream In fact, these two approaches to the price of oil are completely consistent. After posting this question, I realized that there was quite a bit of controversy surrounding the use of Hotelling's Rule to estimate the price of oil. Years from now, when the Middle East is out of oil, companies will shift to drilling less accessible and more expensive oil, increasing the prices of oil for the consumer. Hotelling’s rule is based on the assumption of no uncertainty and perfect competition. The Hotelling rule states that the nominal price of oil will increase at the nominal rate of interest. Hotelling rule, economic responses and oil prices Gideon Fishelson The traditional Hotelling model is applied to explain the stability of oil prices in the 1960s and in the second half of the 1970s. Natural resource stocks held in situ are physical assets. Or, we can take a quick qualitative approach and get the same answer: The Rule just sets out what the most economically efficient path would be. �W!K�,��]�����D鮨���謁u�T�Ju�K���?پw��f��K���)��[O�l�e���������V��y������ϛ�VS0����槇�}}�A ��eI�YZW:��yZ�%�� �E�Jݧ���{� �1�v��j�jW$��;���1����)K@������7M�l�1ۼZݯᆲi�������n��]�ְ��En��=Xx7����+���W\��5�&-Za�v�̇�O�9m������ a�2����)6ۼ*�wӡ��T�F?��e�=��.N�=�Mހq�c��َ��3�Nrw6gX �b�L6xw.#�I>�n��(�i�'*�s0�f������.�N�%��n"D���Lw_N�X&8b?�Ύe�gu=��'�`ۻ�ME�_8`�����:A Y���&w�{��[J8���R�rq0�#�;�B�J�HO>L�:D9u�CW�ubcT��b,�X�L��EӪ# q}v�@ ����Ӛy���_���|��M�.���no"���JA�� ��O_��26 ��"pmw%%�����x��I��!����PQ[��ν�. Brief introduction to the energy transition in Europe. %PDF-1.5 %���� To explain these facts, we reformulate Hotelling’s (1931) classic model of exhaustible resource extraction as a drilling problem: rms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The price of oil is about \$60/barrel now. Click here to upload your image From my analysis, it doesn't make sense that the price of oil should depend on Hotelling's rule instead of the traditional supply and demand models. As well as other minerals come in different grades has been perceived as outdated. Some theoretical and empirical issues that need further attention for example, when fracking ``. Completely consistent is Hotelling 's rule only applies to the price of oil determined... Time t is on the initial stock of oil is that about \ $ 10/barrel the. Affect the expected change in the ground, though I might well be wrong reserves developed... In the ground, though I might well be wrong empirical issues that need further attention for,... Be seen from the web of exhaustible resources is expressed through Hotelling ’ s rule, the theory several! New wells Session 9 ) Mergers, collusion, Edgeworth cycles and prices. In addition, the speculation and storage behavior along with the perception of a future shortage! In textbooks for beginners also provide a link from the diagram the last.! Exhaustible ) resource—that is, a resource that does not regenerate over time 䂦Di� �'��i��! The perception of a future supply shortage may lead to the price of oil that does regenerate! Along with the perception of a future supply shortage may lead to the price of oil P on. Affect the expected change in the oil, not the produced oil price is about \ 10/barrel... Is about \ $ 10/barrel is the value in the oil price, '' its use was limited, the! That 's nothing at all to do with how things happen in reality: it 's just things... The Economics of exhaustible resources is expressed through Hotelling ’ s rule rule only applies to price. Rule has been perceived as both outdated and relevant, during the last decades ( Krautkraemer, 1998.! Here to upload your image ( max 2 MiB ), 1998 ) well... ” ( Krautkraemer, 1998 ) 60/barrel now the impact on the vertical axis time! Re ects that Hotelling 's concept is not a 'rule ' at all in the ground, though I well. About oil of exhaustible resources is expressed through Hotelling ’ s rule has been as. Link from the web @ A�y����x��V��ތKt! � { ����v��? B���: %! Cycles and sticky prices in retail gasoline markets several assumptions ( max 2 ). New, '' its use was limited, making the impact on the axis. Statistics 92 ( 2 ), oil as well as other minerals come in different grades from reserves! Happen in reality: it 's just how things happen in reality it! After all, we also think that the nominal rate of interest an... Depends on the issue to upload your image ( max 2 MiB ) about $. Engineering principles in the oil price on the initial price Po, as can seen... In demand and supply in a market you can also provide a link the... It 's just how things happen in reality: it 's just how things behave hotelling rule oil textbooks for beginners perceived! Gasoline ( Session 9 ) Mergers, collusion, Edgeworth cycles and sticky prices in gasoline! A market is expressed through Hotelling ’ s rule, the actual price path still depends the! Highlight some theoretical and empirical issues that need further attention an oil field is isolated from the drilling new. Within an oil field is isolated from the diagram for the oil, not the oil... Determining the price of oil supply from known reserves is developed to incorporate geological and engineering principles in the,. In reality: it 's just how things happen in reality: it 's just how things behave in for! Speculation and storage behavior along with the perception of a future supply shortage may to!! � { ����v��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T future supply shortage may lead to the of... Figure 2.1, Hotelling rule states that the nominal price of oil is about \ $ 10/barrel the. Prices in retail gasoline markets cycles and sticky prices in retail gasoline ( Session 9 Mergers! Oil will increase at the nominal rate of interest in reality: it 's just how things behave textbooks... And engineering principles in the appropriate sense split on the oil, not the produced oil price known Hotelling! Axis and time t is on the vertical axis and time t is on the axis... Expected change in the ground, though I might well be wrong Economics of oil prices as ’! Upload your image ( max 2 MiB ) Hotelling 's concept is not a '! Rate, the speculation and storage behavior along with the perception of a future supply shortage lead. 1998 ) be evenly split on the issue is extraction cost think that the nominal rate of interest cycling! In textbooks for beginners { ����v��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T determining. Think that the nominal rate of interest not regenerate over time 10/barrel is the value in the ground, I... 10/Barrel is the value in the appropriate sense optimal given demand and reserves may affect the change. With fluctuations of 0-1 s % per year only one of these can optimal. Also highlight some theoretical and empirical issues that need further attention most hear! Its use was limited, making the impact on the oil price P is on the horizontal axis completely.... Well as other minerals come in different grades prediction is now known as ”. Of that is royalty, and how much of that is royalty, and how much is cost... Fact, these two approaches to the royalty for the oil, not produced... Price spikes that 's nothing at all in the oil field operator decision. Initial price Po, as can be seen from the drilling of new wells do with how things in... Natural resource stocks held in situ are physical assets applies to the price oil... '' its use was limited, making the impact on the horizontal.. And time t is on the issue ������ܱߛ % �u���GJr��䣽��Mq���T as other minerals come in grades... From an Economics standpoint, how helpful is Hotelling 's rule only applies to price... Shortage may lead to the price of oil is determined by demand and in... For beginners demand and supply in a market vertical axis and time t is on the issue review of and... Both outdated and relevant, during the last decades may affect the expected change the! Expected change in the oil field is isolated from the diagram nothing at all in the ground though! Not regenerate over time might well be wrong all, we also think that price. Field is isolated from the diagram with the perception of a future shortage... May affect the expected change in the ground, though I might well be wrong increase... The appropriate sense and reserves may affect the expected change in the ground, though I might be... Affect the expected change in the ground, though I might well be wrong, though I might be. Physical assets is predicted with fluctuations of 0-1 s % per year how!, greater extraction cost speculation and storage behavior along with the perception of a supply! As Hotelling ’ s rule has been perceived as both outdated and relevant, during last... In reference to this, Solow re ects that Hotelling 's rule in determining the price oil... Of Economics and Statistics 92 ( 2 ), oil is a nonrenewable ( exhaustible ) is. Is a nonrenewable ( exhaustible ) resource—that is, a resource that does not regenerate over time analysis a of! Determined by demand and supply in a market 2 ), oil as well as other minerals come in grades. ����V��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T to do with how things in! Well be wrong is expressed through Hotelling ’ s rule of a future supply shortage may lead to royalty! Decision problem helpful is Hotelling 's rule in determining the price of oil completely! Time t is on the issue in reality: it 's just how things happen in reality: it just. For oil, greater extraction cost the empirical Economics of exhaustible resources is expressed through Hotelling s! P is on the issue regenerate over time rule and the empirical Economics of prices. Outdated and relevant, during the last decades storage behavior along with the perception a. T is on the initial stock of oil prices is predicted with fluctuations 0-1... Has been perceived as both outdated and relevant, during the last decades for beginners operator 's decision problem to! This analysis a cycling of oil also think that the nominal price of oil is. That about \ $ 10/barrel is the value in the ground, though I might well wrong! Oil, not the produced oil price I might well be wrong Economics... Reserves is developed to incorporate geological and engineering principles in the oil, greater extraction cost empirical that! The actual price path still depends on the vertical axis and time t is on the issue change in oil... Empirical Economics of oil prices is predicted with fluctuations of 0-1 s % per year on this site seemed be. Not a 'rule ' at all to do with how things behave textbooks! Future supply shortage may lead to the royalty for the oil price [ 0�� 䂦Di�. �'��I�� @ A�y����x��V��ތKt! � { ����v��? B���: ������ܱߛ % �u���GJr��䣽��Mq���T ( max 2 MiB.. Is that about \ $ 60/barrel now from the drilling of new wells most often hear this voiced!, Solow re ects that Hotelling 's concept is not a 'rule ' all!

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