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Econometric Modelling of World Oil Supplies: Terminal Price and the Time to Depletion

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  • Mohaddes, K.

Abstract

This paper develops a novel approach by which to identify the price of oil at the time of depletion; the so-called "terminal price" of oil. It is shown that while the terminal price is independent of both GDP growth and the price elasticity of energy demand, it is dependent on the world real interest rate and the total life-time stock of oil resources, as well as on the marginal extraction and scarcity cost parameters. The theoretical predictions of this model are evaluated using data on the cost of extraction, cumulative production, and proven reserves. The predicted terminal prices seem sensible for a range of parameters and variables, as illustrated by the sensitivity analysis. Using the terminal price of oil, we calculate the time to depletion, and determine the extraction and price profiles over the life-time of the resource. The extraction profiles generated seem to be in line with the actual production and the predicted prices are generally in line with those currently observed.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1212.

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Date of creation: 02 Mar 2012
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Handle: RePEc:cam:camdae:1212

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Web page: http://www.econ.cam.ac.uk/index.htm

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Keywords: Oil prices and extraction; terminal price of oil; time to depletion; nonrenewable resources; oil demand estimations; and oil extraction costs.;

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  1. Salih Gurcan Gulen, 1996. "Is OPEC a Cartel? Evidence from Cointegration and Causality Tests," Boston College Working Papers in Economics, Boston College Department of Economics 318., Boston College Department of Economics.
  2. Livernois, John R & Uhler, Russell S, 1987. "Extraction Costs and the Economics of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(1), pages 195-203, February.
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  8. Favero, Carlo A & Pesaran, M Hashem & Sharma, Sunil, 1994. "A Duration Model of Irreversible Oil Investment: Theory and Empirical Evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(S), pages S95-112, Suppl. De.
  9. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, Econometric Society, vol. 74(4), pages 967-1012, 07.
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  11. Devarajan, Shantayanan & Fisher, Anthony C, 1982. "Exploration and Scarcity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1279-90, December.
  12. Farzin, Y H, 1992. "The Time Path of Scarcity Rent in the Theory of Exhaustible Resources," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(413), pages 813-30, July.
  13. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(5), pages 841-61, October.
  14. Hnyilicza, Esteban & Pindyck, Robert S., 1976. "Pricing policies for a two-part exhaustible resource cartel : The case of OPEC," European Economic Review, Elsevier, Elsevier, vol. 8(2), pages 139-154, August.
  15. Pindyck, Robert S, 1978. "Gains to Producers from the Cartelization of Exhaustible Resources," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 238-51, May.
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