Mean Field Game Approach to Production and Exploration of Exhaustible Commodities

TL;DR

This paper models energy markets with many producers using mean field game theory, analyzing optimal production and exploration strategies in exhaustible resource markets through stochastic and deterministic approaches.

Contribution

It introduces a mean field game framework for modeling production and exploration in exhaustible resource markets, including numerical methods and stationary analysis.

Findings

Derived a system of coupled HJB and transport equations for equilibrium analysis.

Developed numerical schemes for solving the mean field game system.

Explored the fluid limit where exploration becomes deterministic.

Abstract

In a game theoretic framework, we study energy markets with a continuum of homogenous producers who produce energy from an exhaustible resource such as oil. Each producer simultaneously optimizes production rate that drives her revenues, as well as exploration effort to replenish her reserves. This exploration activity is modeled through a controlled point process that leads to stochastic increments to reserves level. The producers interact with each other through the market price that depends on the aggregate production. We employ a mean field game approach to solve for a Markov Nash equilibrium and develop numerical schemes to solve the resulting system of non-local HJB and transport equations with non-local coupling. A time-stationary formulation is also explored, as well as the fluid limit where exploration becomes deterministic.