Booming gas – A theory of endogenous technological change in resource extraction

This paper introduces endogenous technological change in a Hotelling-Herfindahl model of natural resource use to study the recent developments U.S. gas industry. We consider optimal forward-looking technology investments, and implications for order extraction conventional shale gas, backstop technology, characterize development prices. find that investments increase during gas. Once production shifts towards decline. Consistent with current trends, our theory explains how prices can follow U-shaped path. The calibrated suggests continues grow continue decrease until 2050. analytically numerically show introduction carbon tax would reduce thus could drastically temporal patterns extraction. behaviour firms is crucial such an effect, which does not occur models treat improvement as unanticipated shock