Modeling peak oil and the geological constraints on oil production

•We model the impacts of geological constraints (GC) on the extraction of oil.•GC induce U-shaped price and marginal profits, and bell-shaped extraction paths.•GC induce small producers to extract comparatively faster than large producers. We propose a model to reconcile the theory of inter-temporal...

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Bibliographic Details
Published in:Resource and energy economics 2015-05, Vol.40, p.36-56
Main Authors: Okullo, Samuel J., Reynès, Frédéric, Hofkes, Marjan W.
Format: Article
Language:English
Subjects:
Economic models
Exploration
Geological constraints
Geology
Globalization
Hotelling rule
Peak oil
Petroleum geology
Petroleum production
Prices
Production increases
Reserve development
Studies
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Summary:•We model the impacts of geological constraints (GC) on the extraction of oil.•GC induce U-shaped price and marginal profits, and bell-shaped extraction paths.•GC induce small producers to extract comparatively faster than large producers. 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 to the global oil market predicts substantially higher future oil prices and considerably lower global oil production with the more realistic geological constraints set-up than with the Hotelling simulation. While mainly (small) non-OPEC producers 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. High future oil prices therefore, do not necessarily translate to increased oil supplies on global markets.
ISSN:0928-7655
1873-0221
DOI:10.1016/j.reseneeco.2015.01.002