Econometric Modelling of World Oil Supplies: Terminal Price and the Time to Depletion

32 Pages Posted: 12 Jun 2013

See all articles by Kamiar Mohaddes

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

Date Written: June 2013

Abstract

This paper develops a novel approach by which to identify the price of oil at the time of depletion; the so‐called ‘terminal price’ of oil. It is shown that while the terminal price is independent of both gross domestic product growth and the price elasticity of energy demand, it is dependent on the world real interest rate and the total lifetime stock of oil resources, as well as on the marginal extraction and scarcity cost parameters. The theoretical predictions of this model are evaluated using data on the cost of extraction, cumulative production and proven reserves. The predicted terminal prices seem sensible for a range of parameters and variables, as illustrated by the sensitivity analysis. Using the terminal price of oil, we calculate the time to depletion and determine the extraction and price profiles over the lifetime of the resource. The extraction profiles generated seem to be in line with the actual production and the predicted prices are generally in line with those currently observed.

Suggested Citation

Mohaddes, Kamiar, Econometric Modelling of World Oil Supplies: Terminal Price and the Time to Depletion (June 2013). OPEC Energy Review, Vol. 37, Issue 2, pp. 162-193, 2013, Available at SSRN: https://ssrn.com/abstract=2278077 or http://dx.doi.org/10.1111/opec.12012

Kamiar Mohaddes (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

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