An assessment of oil supply and its implications for future prices

Abstract

This paper examines three issues related to both the U.S. and world oil supply: (1) the nature of the long-term, postpeak production profile for the U.S. and, by inference, other regions (the Hubbert curve is used as a “strawman” model); (2) implications on U.S. energy security of using a modified Hubbert-type conceptual model of prepeak production, testing the adequacy of Latin America to be the primary source of U.S. oil imports; and (3) the cyclic behavior of oil prices. it shows that U.S. production will exhibit a more attenuated decline than that simulated by the Hubbert curve and not decline to zero. it asserts that U.S. production is better predicted by past reserves than past production, but that this argument does not apply to nations that keep a much larger proportion of reserves in the ground. Such nations could considerably expand production without any growth in reserves. The paper concedes that the potential total production for these nations could be examined with a Hubbert curve model linked to reserves, but with great uncertainty. Such an uncertain optimistic forecast predicts that the cumulative production of Latin America could far exceed that of the United States. Nevertheless, a statistical model of oil prices since 1870 implies that real wellhead oil prices in the United States are on a long-term upward path, underlying a much more “noisy” cyclical pattern estimated to include 22- and 27-year cycles. The statistical model predicts a severe oil shock within a few years (of 1998) but also predicts that through 2030, real oil prices will not reach 1981 levels again. The paper examines U.S. and world trends in seismic exploration, drilling locations and depths, drilling costs, oil/gas reserves, oil/gas use rates, and oil demand. After taking these factors into consideration, it concludes that the statistical model of oil prices cannot be disputed, despite its lack of basis in economic theory.