Modeling Peak Oil and the Geological Constraints on Oil Production

25 Pages Posted: 6 Jun 2014

See all articles by Samuel J Okullo

Samuel J Okullo

Potsdam-Institut für Klimafolgenforschung (PIK)

Frederic Reynes

VU University Amsterdam - Institute for Environmental Studies (IVM)

Marjan W. Hofkes

Vrije Universiteit Amsterdam

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 J and Reynes, Frederic and Hofkes, Marjan W., Modeling Peak Oil and the Geological Constraints on Oil Production (June 4, 2014). Available at SSRN: https://ssrn.com/abstract=2446055 or http://dx.doi.org/10.2139/ssrn.2446055

Samuel J Okullo (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

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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