Modeling Peak Oil and the Geological Constraints on Oil Production

CentER Discussion Paper Series No. 2014-036

26 Pages Posted: 6 Jun 2014

See all articles by Samuel Jovan Okullo

Samuel Jovan Okullo

VU University Amsterdam - Institute for Environmental Studies (IVM)

Frederic Reynes

VU University Amsterdam - Institute for Environmental Studies (IVM)

Marjan W. Hofkes

Vrije Universiteit Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2014

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.

Keywords: Peak oil, Hotelling rule, Exploration, Reserve development, Geological constraints

JEL Classification: Q30, Q47, C61, C7

Suggested Citation

Okullo, Samuel Jovan and Reynes, Frederic and Hofkes, Marjan W., Modeling Peak Oil and the Geological Constraints on Oil Production (June 4, 2014). CentER Discussion Paper Series No. 2014-036, Available at SSRN: https://ssrn.com/abstract=2445944 or http://dx.doi.org/10.2139/ssrn.2445944

Samuel Jovan Okullo (Contact Author)

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

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

Frederic Reynes

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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