Alternatives to conventional crude oil: When, how quickly, and market driven?
We examine the effect of uncertainty concerning remaining supplies of conventional crude oil and its production path on: the date alternative fuels will be needed, the quantity of alternative fuels needed, and how this uncertainty affects firms' willingness to provide alternatives in a timely fashion. Despite large uncertainties about the quantity of oil that remains and its production path, the start date for replacements is likely to fall within a twenty-two year period that is narrower and earlier than previous estimates. The twenty-two year window represents considerable uncertainty about the date of the peak and this uncertainty creates an asymmetry in the strategy that maximizes the welfare of firms relative to total social welfare, which works against the market's ability to generate a smooth transition from oil to alternative fuels. The timeliness of this transition is critical--the production paths generated here suggest that 10Â million barrels per day or more of alternative fuels will be needed within a decade of the peak in production of conventional crude oil.
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