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Modeling Peak Oil and the Geological Constraints on Oil Production

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  • Okullo, S.J.

    (Tilburg University, Center For Economic Research)

  • Reynes, F.
  • Hofkes, M.W.

Abstract

We propose a model to reconcile the theory of inter-temporal non-renewable resource depletion with well-known stylized facts concerning the exploitation of exhaustible resources such as oil. Our approach introduces geological constraints into a Hotelling type extraction-exploration model. We show that such constraints, in combination with initially small reserves and strictly convex exploration costs, can coherently explain bell-shaped peaks in natural resource extraction and hence U-shapes in prices. As production increases, marginal profits (marginal revenues less marginal extraction cost) are observed to decline, while as production decreases, marginal profits rise at a positive rate that is not necessarily the rate of discount. A numerical calibration of the model to the world oil market shows that geological constraints have the potential to substantially increase the future oil price. While some (small) non-OPEC producers are found to increase production in response to higher oil prices induced by the geological constraints, most (large) producers’ production declines, leading to a lower peak level for global oil production.

Suggested Citation

  • Okullo, S.J. & Reynes, F. & Hofkes, M.W., 2014. "Modeling Peak Oil and the Geological Constraints on Oil Production," Discussion Paper 2014-036, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:db6aecf8-bc32-478d-b0cd-138ea2ed182f
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    Cited by:

    1. Aune, Finn Roar & Grimsrud, Kristine & Lindholt, Lars & Rosendahl, Knut Einar & Storrøsten, Halvor Briseid, 2017. "Oil consumption subsidy removal in OPEC and other Non-OECD countries: Oil market impacts and welfare effects," Energy Economics, Elsevier, vol. 68(C), pages 395-409.
    2. Finn Roar Aune & Ann Christin Bøeng & Snorre Kverndokk & Lars Lindholt & Knut Einar Rosendahl, 2017. "Fuel Efficiency Improvements: Feedback Mechanisms and Distributional Effects in the Oil Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(1), pages 15-45, September.
    3. Okullo, Samuel & Reynes, F. & Hofkes, M., 2016. "Biofuel Mandating and the Green Paradox," Discussion Paper 2016-024, Tilburg University, Center for Economic Research.
    4. Okullo, Samuel J. & Reynès, Frédéric, 2016. "Imperfect cartelization in OPEC," Energy Economics, Elsevier, vol. 60(C), pages 333-344.
    5. repec:eee:eneeco:v:69:y:2018:i:c:p:261-269 is not listed on IDEAS
    6. Ben Gilbert & Gavin Roberts, 2018. "Supply-side links in oil and gas markets," Working Papers 2018-04, Colorado School of Mines, Division of Economics and Business.

    More about this item

    Keywords

    Peak oil; Hotelling rule; Exploration; Reserve development; Geological constraints;

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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