Elsevier

Energy

Volume 32, Issue 8, August 2007, Pages 1448-1454
Energy

Technology and petroleum exhaustion: Evidence from two mega-oilfields

https://doi.org/10.1016/j.energy.2006.10.019Get rights and content

Abstract

In this paper, we use results from the Hotelling model of non-renewable resources to examine the mainstream view among economists that improvements in recovery technology can offset declines in petroleum reserves. We present empirical evidence from two well-documented mega-oilfields: the Forties in the North Sea and the Yates in West Texas. Patterns of depletion in these two fields suggest that technology temporarily increases the rates of production at the expense of more pronounced rates of depletion in later years—in line with Hotelling's predictions. Insofar as our results are generalizable, they call into question the view of most economists that technology can mitigate absolute resource scarcity. This raises concerns about the capacity of current mega-fields to meet future oil demand.

Section snippets

The economic view of resource scarcity

A recurring theme in resource economics textbooks is that absolute resource scarcity is not a major concern for economic policy. The standard view is that the price system, by encouraging substitution, exploration, and technological advances, in effect creates more resources as prices increase. In this view, scarcity is properly seen as an economic not a physical concept [1]. The view expressed in a recent text by Hanley et al. [2] is typical:

As a resource gets scarcer, its price will, other

Hotelling revisited

It is only a small exaggeration to say that most contemporary resource economics is a footnote to Hotelling's paper “The Economics of Exhaustible Resources.” [14]. Following Krautkraemer [16], the basic Hotelling equation can be written asMaximizee-δt[B(q(t),S(t))-C(q(t),S(t))]dtsubject toS˙(t)=-q(t),S(t)0,q(t)0,S(0)=S0,where B[q(t), S(t)] represents gross benefits, C[q(t),S(t)] are the extraction costs; S is the remaining stock, δ is the rate of discount, and q(t) is the time path for

Is extraction technology masking scarcity? Evidence from the North Sea and West Texas

In this section, we present the production paths that followed in the North Sea Forties and the West Texas Yates mega oilfields using historical production data reported by the United Kingdom Department of Trade and Industry and the Railroad Commission of Texas, respectively. We purposely focus on these two well-surveyed and well-documented individual fields—rather than more aggregate examples—so as to acknowledge the strict scarcity of the resource, as assumed in Hotelling's framework.

The

Demand, royalties, and geopolitics: Hotelling once again

We have argued that the evidence indicates that technological change increases production for a while but then the path to exhaustion becomes steeper than it would have been without the new technology. Ceteris paribus, technological change increases resource supply and decreases the resource price for a while but results in sharply higher prices in later periods because the resource is exhausted faster than it would have been without the new technology. This implies that current prices are

Discussion and conclusion

Petroleum resources are not infinite on our planet and in the coming decades increasing pressure will be placed on the ability of oil to supply energy for the world's growing economies. Technological progress has been posed as the major contributor in the coming years to the mobilization of new reserves and increasing the lifetime of present reserves. In this paper, we examined this hypothesis and showed evidence from two well-documented mega-oilfields—the Forties in the North Sea and the Yates

Acknowledgments

We are grateful for the valuable comments provided by Jason Benno, Jerry Gilbert, Charles Hall, John Hallock, Alexey Voinov, and Jack Zagar. We would like to thank the Texas Railroad Commission for providing data about the Yates field. All conclusions and opinions are the responsibilities of the authors.

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