Intergenerational allocation of exhaustible natural resources: The case of natural gas in Israel

In this paper, we present a simple solution to the problem of exhaustible resource allocation using a general equilibrium (GE) model1, to find intergenerational allocation of exhaustible natural resources, and to calculate the impact of different extraction scenarios on current and future economic welfare. The paper provides an evaluation of the economic welfare of different natural gas (NG) extraction options and government's take management alternatives to identify the best path for current and future generations of the citizens of Israel. We quantify the economic effects of different NG extraction scenarios, including effects on consumers' utility, profits of NG extraction firms, state income and electricity producers' profits. We also examine the impact of various resource income-allocation strategies on economic welfare, through the mechanism of a "sovereign wealth fund" (SWF). We apply the GE model to the Israel's NG market to evaluate economic indicators resulting from NG-extraction scenarios: a Baseline Scenario based on current policy in the NG sector, a Conservative Scenario based on a lower extraction rate, and an Intensive Scenario based on a faster extraction. High extraction rates along with transferring the government's take into a SWF can be a good strategy to maintain sustainable economic growth, specifically if returns from the SWF are invested in R&D in renewable electricity-production projects. The findings from this research allow policymakers to assess and adjust their activities in the energy sector, and to consolidate a management strategy for the NG sector. The GE model developed in this study can be applied to other sectors, other countries and other exhaustible resources.