How Does Economic Theory Explain the Hubbert Peak Oil Model?

36 Pages Posted: 20 Nov 2010 Last revised: 23 Nov 2010

See all articles by Frederic Reynes

Frederic Reynes

VU University Amsterdam - Institute for Environmental Studies (IVM)

Samuel Jovan Okullo

VU University Amsterdam - Institute for Environmental Studies (IVM)

Marjan W. Hofkes

Vrije Universiteit Amsterdam

Date Written: November 18, 2010

Abstract

This article compares the advantages and limits of the two main methods used in the literature to model oil production: the technical Hubbert approach and the economic Hotelling approach. We argue that the technical approach can be nested in the economic approach by showing that a technical or geological constraint can be reinterpreted as a cost constraint. This provides an economic foundation for Hubbert’s peak oil model. As profitability is the main driver behind production plans, we show that changes in profitability due to divergent trajectories between costs and oil price may give rise to a Hubbert production curve. For this result we do not need to introduce a decreasing cost effect as is generally assumed in the literature.

Keywords: Hubbert Peak, Hotelling, Depletion Effect

JEL Classification: Q30, Q41

Suggested Citation

Reynes, Frederic and Okullo, Samuel Jovan and Hofkes, Marjan W., How Does Economic Theory Explain the Hubbert Peak Oil Model? (November 18, 2010). USAEE Working Paper No. 10-052, Available at SSRN: https://ssrn.com/abstract=1711610 or http://dx.doi.org/10.2139/ssrn.1711610

Frederic Reynes (Contact Author)

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Samuel Jovan Okullo

VU University Amsterdam - Institute for Environmental Studies (IVM) ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Marjan W. Hofkes

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

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