Modeling Peak Oil and the Geological Constraints on Oil Production

S.J. Okullo, F. Reynes, M.W. Hofkes

Research output: Working paperDiscussion paperOther research output

735 Downloads (Pure)

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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages51
Volume2014-036
Publication statusPublished - 4 Jun 2014

Publication series

NameCentER Discussion Paper
Volume2014-036

Fingerprint

oil production
oil
modeling
nonrenewable resource
resource depletion
cost
natural resource
calibration
market
resource
price
rate
profit

Keywords

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

Cite this

Okullo, S. J., Reynes, F., & Hofkes, M. W. (2014). Modeling Peak Oil and the Geological Constraints on Oil Production. (CentER Discussion Paper; Vol. 2014-036). Tilburg: Economics.
Okullo, S.J. ; Reynes, F. ; Hofkes, M.W. / Modeling Peak Oil and the Geological Constraints on Oil Production. Tilburg : Economics, 2014. (CentER Discussion Paper).
@techreport{db6aecf8bc32478db0cd138ea2ed182f,
title = "Modeling Peak Oil and the Geological Constraints on Oil Production",
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 convexexploration 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 globaloil production.",
keywords = "Peak oil, Hotelling rule, Exploration, Reserve development, Geological constraints",
author = "S.J. Okullo and F. Reynes and M.W. Hofkes",
year = "2014",
month = "6",
day = "4",
language = "English",
volume = "2014-036",
series = "CentER Discussion Paper",
publisher = "Economics",
type = "WorkingPaper",
institution = "Economics",

}

Okullo, SJ, Reynes, F & Hofkes, MW 2014 'Modeling Peak Oil and the Geological Constraints on Oil Production' CentER Discussion Paper, vol. 2014-036, Economics, Tilburg.

Modeling Peak Oil and the Geological Constraints on Oil Production. / Okullo, S.J.; Reynes, F.; Hofkes, M.W.

Tilburg : Economics, 2014. (CentER Discussion Paper; Vol. 2014-036).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Modeling Peak Oil and the Geological Constraints on Oil Production

AU - Okullo, S.J.

AU - Reynes, F.

AU - Hofkes, M.W.

PY - 2014/6/4

Y1 - 2014/6/4

N2 - 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 convexexploration 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 globaloil production.

AB - 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 convexexploration 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 globaloil production.

KW - Peak oil

KW - Hotelling rule

KW - Exploration

KW - Reserve development

KW - Geological constraints

M3 - Discussion paper

VL - 2014-036

T3 - CentER Discussion Paper

BT - Modeling Peak Oil and the Geological Constraints on Oil Production

PB - Economics

CY - Tilburg

ER -

Okullo SJ, Reynes F, Hofkes MW. Modeling Peak Oil and the Geological Constraints on Oil Production. Tilburg: Economics. 2014 Jun 4. (CentER Discussion Paper).