Nonrenewable Resource Allocation under Intertemporally Dependent Demand

It is often argued informally that demand responses to the major oil price increases of 1973 and 1979 were still not complete several years after the events. The evidence, moreover, is that the long-run price elasticity of demand exceeds the short-run price elasticity, both for energy aggregates and individual energy carriers (see Kouris, 1983, for a survey). One reason is undoubtedly that the possibilities for substituting away from a particular energy resource, or energy in general, in “production” cannot be activated instantaneously, even at prohibitive cost. Existing processes have to be modified, new capital equipment ordered and installed, etc. (see Sweeney, 1983, for an overview of these arguments). The upshot of this is that the demand for energy and energy carriers has a dynamic structure.

By: A. Khadr

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