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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.

Suggested Citation

  • Mohaddes, K., 2012. "Econometric Modelling of World Oil Supplies: Terminal Price and the Time to Depletion," Cambridge Working Papers in Economics 1212, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1212
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    Cited by:

    1. Mohaddes, Kamiar & Pesaran, M. Hashem, 2016. "Country-specific oil supply shocks and the global economy: A counterfactual analysis," Energy Economics, Elsevier, vol. 59(C), pages 382-399.

    More about this item

    Keywords

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

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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