Fiscal Regime Uncertainty, Risk Aversion, and Exhaustible Resource Depletion

How d s u n c e r t a i n t y a b o u t f u t u r e r e n t t a x l i a b i l i t y a f f e c t t h e compe t i t i ve supply p a t t e r n f o r an e x h a u s t i b l e resource? H i s t o r i c a l l y , changes i n t a x and r e g u l a t o r y c l a u s e s h a v e b e e n a f r e q u e n t occurrence i n t h e Petroleum indus t ry , and appear t o h a v e c o n t r i b u t e d t o t h e c l i m a t e o f u n c e r t a i n t y a b o u t f u t u r e r e n t a p p r o p r i a t i o n . T h i s p a p e r d e v e l o p s a g e n e r a l l y a p p l i c a b l e framework t o t a c k l e t h i s q u e s t i o n . The a n a l y s i s m o d i f i e s t h e c l a s s i c H o t e l l i n g problem of e x h a u s t i b l e r e s o u r c e management t o embody p r o d u c e r r i s k a v e r s i o n i n terms of t h e under ly ing p o r t f o l i o a l l o c a t i o n behaviour o f firms' owners, us ing a s imple mean-variance approach. The c o n s t r u c t is then used t o derive e q u i l i b r i u n price p r o f i l e s f o r t h e resource u n d e r a number o f d i f f e r e n t methods of c h a r a c t e r i z i n g t h e r i s k , i nc lud ing a %ontinuoustl v a r i e t y under which meanva r i ance a n a l y s i s g i v e s g e n e r a l r e s u l t s . By and l a r g e , t h e r e s u l t s s u g g e s t t h a t t h i s t y p e of u n c e r t a i n t y p romotes e x c e s s i v e l y r a p i d d e p l e t i o n . I m p o r t a n t e x c e p t i o n s a r i s e where r e n t v a r i a b i l i t y (i) does n o t i n c r e a s e the more d i s t a n t t h e h o r i z o n ; a n d ( i i) e x h i b i t s a n e g a t i v e c o r r e l a t i o n w i t h dominant sources o f r i s k i n i n v e s t o r s ' p o r t f o l i o s .