On stockpiling natural resources Charles F. Mason * H.A. True Chair in Petroleum and Natural Gas Economics, Department of Economics & Finance, University of Wyoming, 1000 E. University Ave., Laramie, WY 82071, United States 1. Introduction Significant private stockpiling of natural resources have been an important empirical regularity in the U.S for some time. Stockpiles of copper and heating oil are commonly 150–300% of annual consumption (Pindyck, 1994; Thurman, 1988). Similarly, inventory holdings are important in markets for coal, gold, silver and uranium (Williams and Wright, 1991). For the past several decades private interests have held sufficient inventories of crude oil to supply U.S. refineries for roughly 3 weeks; similarly large stockpiles are held of natural gas. 1 In the traditional Hotelling (1931) resource extraction framework, with deterministic demand and stock-independent costs, prices must increase so as to inter-temporally equate rents. Here, for firms to be willing to hold inventories, prices would have to rise at or above the rate of interest. But if prices Resource and Energy Economics 33 (2011) 398–409 ARTICLE INFO Article history: Received 1 June 2009 Accepted 1 February 2010 Available online 30 June 2010 JEL classification: Q2 D8 L15 Keywords: Resource economics Stochastic dynamic optimization ABSTRACT Persistent and significant privately held stockpiles of minerals have long been an important empirical regularity in the United States. Such stockpiles would not rationally be held in a traditional Hotelling-style model, though firms could be willing to hold inventories if extraction costs are stock-dependent. More plausibly, if prices are stochastic, and sufficiently volatile, firms have an incentive to hold inventories to smooth production over time. ß 2010 Elsevier B.V. All rights reserved. * Corresponding author. Tel.: +1 307 766 2178; fax: +1 307 766 5090. E-mail address: bambuzlr@uwyo.edu. 1 Detailed statistics on production, consumption, stockpiles and prices of these minerals are available at the U.S. Energy Information Administration website, www.eia.doe.gov. Contents lists available at ScienceDirect Resource and Energy Economics journal homepage: www.elsevier.com/locate/ree 0928-7655/$ – see front matter ß 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.reseneeco.2010.05.008