An option value analysis of hydraulic fracturing
| dc.contributor.author | Hess, Joshua H., author | |
| dc.contributor.author | Iverson, Terrence, advisor | |
| dc.contributor.author | Cutler, Harvey, committee member | |
| dc.contributor.author | Weiler, Stephan, committee member | |
| dc.contributor.author | Manning, Dale, committee member | |
| dc.date.accessioned | 2018-01-17T16:45:49Z | |
| dc.date.available | 2018-01-17T16:45:49Z | |
| dc.date.issued | 2017 | |
| dc.description.abstract | Many uncertain public policy decisions with sunk costs can be optimally timed leading policymakers to delay implementing a policy despite positive expected net present value. One salient example of this is hydraulic fracturing (fracking), a recently developed oil and gas extraction technology, that has increased fossil fuel reserves in the US. However, many municipalities have seen fit to ban its use despite seemingly positive expected net benefits. We hypothesize that an option value framework that values the ability to delay and learn about an uncertain project may explain fracking bans in practice where the neoclassical net present value rule does not. We test this by developing a stochastic dynamic learning model parameterized with a computable general equilibrium (CGE) model that calculates the value of learning about uncertainty over damages and uncertainty over benefits. Applying the model to a representative Colorado municipality, we quantify the quasi-option values (QOV), which create an additional incentive to ban fracking temporarily in order to learn. To our knowledge, this is the first attempt to quantify an economy-wide QOV associated with a local environmental policy decision. In Chapter 1 we argue that a numerical, option value approach is the appropriate way to examine uncertain public policy issues involving sunk costs. This method allows for an optimal timing of the public project rather than the 'now or never' approach of the ubiquitous net present value rule. We present local fracking policy as an excellent application for an option value approach as has positive expected net benefits but has been subject to local bans seemingly despite the net present value rule. We also defend our use of a CGE model to estimate the local economic benefits of fracking. Chapter 2 presents the option value model associated with epistemological uncertainty over environmental damages. Also, this chapter presents damage values parameterized to the City of Fort Collins for application in this and the subsequent chapter. With this in hand, we solve the model and demonstrate the results. Chapter 3 has a similar structure to Chapter 2. First, it discusses the literature on stochastic oil movements, then it presents the option value model associated with stochastic uncertainty over local benefits. Then, assuming the same parameterized expected damage as in Chapter 2, we solve the model and display the results. | |
| dc.format.medium | born digital | |
| dc.format.medium | doctoral dissertations | |
| dc.identifier | HESS_colostate_0053A_14514.pdf | |
| dc.identifier.uri | https://hdl.handle.net/10217/185696 | |
| dc.language | English | |
| dc.language.iso | eng | |
| dc.publisher | Colorado State University. Libraries | |
| dc.relation.ispartof | 2000-2019 | |
| dc.rights | Copyright and other restrictions may apply. User is responsible for compliance with all applicable laws. For information about copyright law, please see https://libguides.colostate.edu/copyright. | |
| dc.subject | computational economics | |
| dc.subject | hydraulic fracturing | |
| dc.subject | computable general equilibrium | |
| dc.subject | stochastic process | |
| dc.subject | dynamic programming | |
| dc.title | An option value analysis of hydraulic fracturing | |
| dc.type | Text | |
| dcterms.rights.dpla | This Item is protected by copyright and/or related rights (https://rightsstatements.org/vocab/InC/1.0/). You are free to use this Item in any way that is permitted by the copyright and related rights legislation that applies to your use. For other uses you need to obtain permission from the rights-holder(s). | |
| thesis.degree.discipline | Economics | |
| thesis.degree.grantor | Colorado State University | |
| thesis.degree.level | Doctoral | |
| thesis.degree.name | Doctor of Philosophy (Ph.D.) |
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