Economics of Petroleum as a Natural Resource

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ECONOMICS OF

PETROLEUM AS ANATURAL RESOURCETEAMAbimanyu NN

Jayaprakash MShweta JBharani SSantra HR

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Introduction

Basic economic model of a market -Adam Smith in 1776

Under assumptions of perfectcompetition, the market price acts toequilibrate supply and demand.

Supply and demand of petroleum Highly unbalanced

OPEC

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Model of Supply andDemand

General Framework

Each market t

D Demand ; S - Supply pt Price of oil; qt Quantity of oil

transacted

xt Vector of covariatescharacterizing the market

D(qt) [pt;xt] = S(qt) [pt;xt]

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Model of Supply andDemand

Simultaneity Problem

Linear Market Model

Demand and Supply functions arelinear

Simplification of Estimation

Useful Benchmark in future work

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Oil Production Over TheYears

US Dollars perBarrel

Dubai $/bbl Brent $/bbl NigerianForcados$/bbl

West TexasIntermediate$/bbl

1975 10.70 - - -

1980 35.69 36.93 36.98 37.96

1985 27.53 27.56 27.75 27.99

1990 20.45 23.73 23.85 24.50

1995 16.10 17.02 17.26 18.42

2000 26.20 28.50 28.42 30.37

2005 49.35 54.52 55.69 56.59

2010 78.06 79.50 81.05 79.45

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Oil Production Over TheYears

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Oil Production Over TheYears

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Peak Oil Scenario

Point in time - Maximum rate ofglobal petroleum extraction isreached

Hubbert Curve

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Peak Oil Scenario

Hubbert Peak Theory

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Peak Oil Scenario

Price of oil - Economic recessions -1973 and 1979 energy crises

Peak oil - Viewed as positive event Mitigation of peak oil

Economist Michael Lynch - Hubbert

curve is too simplistic The Canadian oil sands

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Economical Solutions

Narrowing supply-demand gap. Reducing extraction cost. Use of renewable and substitute products. Competition among OPEC and non-OPEC.

Innovation for reducing energy consumption per GDP. Exploring new resource sites.

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References

The Journal of Energy andDevelopment, C.Y. Cynthia Lin,Volume 34, Number 1

"Nuclear Energy and the FossilFuels, M. King Hubbert, Drilling andProduction Practice (1956) American

Petroleum Institute & ShellDevelopment Co. Publication No. 95

How General is the Hubbert

Curve?, Ugo Bardi and Leigh Yaxley,

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References

Oil and the Future, Richard Reese2007

BP Statistical Review of WorldEnergy, June 2011

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THANK YOU