Douglas B. Reynolds

The mineral economy: how prices and costs can falsely signal decreasing scarcity

Abstract Natural resource prices and costs of extraction have declined simultaneously with increasing quantities of extraction for a long time. In a Hotelling sense this indicates decreasing scarcity since low cost resources normally would be used first and quantities of extraction normally would decrease over time. The main reason for the trend being opposite to Hotelling characteristics is usually thought to be due to technological innovation. However, an alternative reason for decreasing costs and prices and increasing quantities of extraction may be due to Georgescu-Roegen’s [Georgescu-Roegen, Nicholas, 1972. Energy and economic myth. In: Georgescu-Roegen, Nicholas (Ed.), Energy and Economic Myths: Institutional and Analytical Economic Essays. Published 1976, Pergamon Press, New York, pp. 3–36] concept of ‘Bonanza’ where there is only the appearance of decreasing scarcity. Norgaard’s [Norgaard, R.B., 1990. Economic indicators of resource scarcity: a critical essay. J. Environ. Econ. Manage. 19(1), 19–25] ‘Mayflower’ problem can be used to model an alternative neo-classical approach to resource extraction and scarcity. In this paper, a model of resource exploration is developed where the explorer does not know total reserves of the resource base as he searches for and extracts the natural resource. The explorer never entirely knows how big the resource base is but does gain information about the potential location of new reserves as discovery proceeds. That reduces exploration costs. The lower exploration costs can cause the price to fall over time, until eventually scarcity of the resource causes the price to rise. The true scarcity is only revealed towards the end of exhaustion. The model shows that it is possible to have several years of increasing production simultaneous with lower prices and costs until a sudden, intense price rise occurs with a huge cut in production. When technology is able to cut costs and increase the reserve base, the decline in prices and costs and the increase in production can last longer. However, even with better technology, it is still possible for a sharp increase in price as long as demand is growing faster than technological innovation. The problem is that the true size of the resource base is never known. Society does not know if technology is actually overcoming scarcity or not until demand for a resource outstrips supplies. It is even possible for a price shock of incredible magnitude to surprise an economy within one or two years after a hundred years of declining prices and increasing production.

Oil Exploration Game with Incomplete Information: An Experimental Study

This paper presents a Monte Carlo simulation, using economics students, that shows the characteristics of oil exploration. Oil discovery in the US started low, increased, and then declined again. One explanation for this small-large-small sequence of discovery is the role of information. Initial information scarcity causes high exploration costs and low discovery. Eventually information increases, pushing exploration costs down and discovery up. Finally, scarcity of resources pushes costs back up again and discovery down. The experimental economics simulation explained here shows this to be the case.

Using Non-Time-Series to Determine Supply Elasticity: How Far do Prices Change the Hubbert Curve?

An important concern of OPECs work is to be able to understand how much supply of oil exists in different countries, in order to help better conserve oil. This paper extends M. King Hubberts oil production and discovery forecasting model (Hubbert, 1962), using a non-time-series cumulative discovery and production quadratic Hubbert curve and structural shift variables to model technology and regulation changes. The model can be used to determine better world oil supplies. Price is tested, to see how powerful it is for increasing or decreasing oil supply. Using a trend of cumulative production, instead of time, will help to better fix the supply elasticity with respect to price, which is shown to be very inelastic. An interesting question is whether cumulative discovery or production constitutes an I(2) variable. This paper explains that they are not I(2) variables.

Entropy and diminishing elasticity of substitution

Abstract In the debate over sustainable development and limits to growth, one critical issue has to do with substitutability. ‘Weak’ sustainability as the ability to maintain a generalized capacity to produce is described by Pearce, D.W., Atkinson, G.D., Dubourg, W.R., 1994. The economics of sustainable development. In: Socolow, R.H. (Ed.), Annual Review of Energy and the Environment, vol. 19, 457–474. Weak sustainability can occur in the face of a non-renewable, non-recyclable, essential resource if the economy can substitute capital for the essential resource is shown theoretically in Solow, R.M., 1974. Intergenerational equity and exhaustible resources. Review of Economic Studies, Symposium on the Economics of Exhaustible Resources, pp. 29–45; Hartwick, J.M., 1977. Intergenerational equity and the investing of rents from exhaustible resources. American Economic Review 67(5), 972–974; Dasgupta, P.S., Heal, G.M., 1979. Economic Theory and Exhaustible Resources, Cambridge University Press, Cambridge, 196–207. However, the analyses depend on a Cobb-Douglas production function with a constant elasticity of substitution out to infinity. This paper shows that a Cobb-Douglas function eventually violates entropy and that the elasticity of substitution between any two inputs must at some point become zero. Different types of substitution are examined to show how physics and the law of entropy cause the elasticity of substitution to decline.

Modeling OPEC behavior: theories of risk aversion for oil producer decisions

Abstract Theories of OPEC such as price leadership, cartel, or game theoretic models suggest an incentive for OPEC members to expand their production capacity well above current levels in order to maximize revenues. Yet individual OPEC members consistently explore for and develop oil fields at a level well below their potential. The cause of low oil exploration and development efforts among OPEC members, and even some non-OPEC members, may have to do with risk aversion. This paper describes an alternative theory for OPEC behavior based on risk aversion using a two piece non Neumann–Morgenstern utility function similar to Fishburn and Kochenberger (1979, Decision Science 10, 503–518), and Friedman and Savage (1948, Journal of political Economy 56). The model shows possible low oil production behavior.

The Energy Utilization Chain: Determining Viable Oil Alternative Technology

This article examines the continuing debate over the limits to economic growth focusing on oil, oil technologies, and the services provided by those technologies. Since there is a growing consensus that oil production will be in short supply in the next 30 or so years, it is important to examine all viable oil alternatives. We use the concept of the energy utilization chain (EUC) to evaluate oil alternatives and their effect on the economy. The EUC effectively makes the connection between a resource shortage and economic growth. We conclude that all oil alternatives now and in the next 30 - 40 years will create a declining economy.

The case for conserving oil resources: the fundamentals of supply and demand

This article summarises the evidence for an oil price shock and argues that oil producers, both OPEC and non-OPEC, need to cut back oil production more, in order to conserve oil for the future and to avert sudden extreme movements in oil prices in the next five-to-ten years. Four physical fundamentals determine long-run changes in oil prices: supply, demand, technology and substitutes. We show that supply, technology and substitutes are limited and demand is growing strongly. As demand pushes against supply, prices will rise rapidly. It would be better to conserve oil now, in order to have a smoother transition to higher-priced oil in the future. In addition, oil is such a valuable resource for the worlds economies in general, that we should conserve it for future generations. The world, in its haste for economic growth, should support OPEC conservation efforts.

A Probabilistic Economic Analysis of the Transportation of GTL Blends Through TAPS

Abstract The Alaska North Slope is a potential candidate for gas to liquid (GTL) technology. With over 38 trillion cubic feet (TCF) of natural gas reserves stranded on the Alaska North Slope, GTL technology is considered as a possible method of harnessing the abundant resources. The main objective of this study is to perform a complete economic evaluation using rate of return analysis and the net present value to identify the most favorable commingled mode for the transportation of the GTL products. Crystal Ball software was also used to run sensitivity analysis by using the probabilistic approach to give a clear view of the various scenarios on the project economics. Evaluating the options of transporting GTL products as a blend (commingled) with the Alaska North Slope crude oil through the existing Trans-Alaska Pipeline System is the main focus of this study.

Economic Appraisal of Transporting Gas-to-Liquids Products through the Trans-Alaska Pipeline System (TAPS)

Abstract The Alaska North Slope oilfield is a potential candidate for the gas-to-liquid (GTL) technology. With over 38 Tcf of natural gas occurring on the slope, gas gathering for a GTL facility will be relatively easy. GTL fuels are environmentally friendly (sulfur free) with better ignition and burning properties than conventional petroleum products from crude oil. Evaluating the options of transporting GTL products through the existing Trans-Alaska Pipeline System (TAPS) together with crude oil, either as a blend of crude oil and GTL (commingled) or as alternate slugs of each product (batching), is the main focus of this study. Economic evaluation model was employed using Rate of Return analysis to identify the most favorable mode of transportation of the GTL products. Batching, using modern tracking and sensor techniques, was found to be a more economic mode, yielding the highest rate of return on the investment.

From declared asset retirement obligations to a decommissioning cost estimate for onshore crude oil fields in Nigeria

As in most mature crude oil producing regions, asset divestment has commenced in Nigeria. Decommissioning and associated environmental liabilities are expected to become important problems requiring attention. Public and government engagement on decommissioning will be ineffective without information on cost of decommissioning liabilities, which are held confidential by oil companies. This study demonstrates a method to determine generic aggregate cost of decommissioning liabilities for Nigeria onshore fields, using non-proprietary data from annual financial reports of operating companies in Nigeria. The results can be used as basis for negotiation with operators and to help government in preparation for decommissioning risk.