Modeling Peak Oil and the Geological Constraints on Oil Production

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

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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

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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.