Optimal oil production and taxation under mean reverting jump diffusion models

DOI10.1016/J.JMAA.2021.125777zbMATH Open1479.91247arXiv1704.04714OpenAlexW3210427557MaRDI QIDQ2059945FDOQ2059945

Moustapha Pemy

Publication date: 13 December 2021

Published in: Journal of Mathematical Analysis and Applications (Search for Journal in Brave)

Abstract: This paper studies the optimal extraction policy of an oil field as well as the efficient taxation of the revenues generated. Taking into account the fact that the oil price in worldwide commodity markets fluctuates randomly following global and seasonal macroeconomic parameters, we model the evolution of the oil price as a mean reverting regime-switching jump diffusion process. Given that oil producing countries rely on oil sale revenues as well as taxes levied on oil companies for a good portion of the revenue side of their budgets, we formulate this problem as a differential game where the two players are the mining company whose aim is to maximize the revenues generated from its extracting activities and the government agency in charge of regulating and taxing natural resources. We prove the existence of a Nash equilibrium and the convergence of an approximating scheme for the value functions. Furthermore, optimal extraction and fiscal policies that should be applied when the equilibrium is reached are derived.A numerical example is presented to illustrate these results.

Full work available at URL: https://arxiv.org/abs/1704.04714

zbMATH Keywords

regime switchingjump diffusionNash equilibriumnumerical approximationstochastic differential gamesoil production

Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64) Applications of game theory (91A80) Economic models of real-world systems (e.g., electricity markets, etc.) (91B74) Stochastic games, stochastic differential games (91A15) Jump processes on discrete state spaces (60J74)

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Cited In (3)

• Optimal oil production and the world supply of oil
• Optimal production and regulation of gold mining: a stochastic differential game approach
• The Looking Forward Approach in a Differential Game Model of the Oil Market with Non-transferable Utility

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