Oil Production in the Lower 48 States: Economic,Geological,and Institutional Determinants

Abstract

In this paper, we establish an empirical model for oil production in the lower 48 states that represents its economic, physical, and institutional determinants. We estimate a vector error correction model for oil production in the lower 48 states that specifies real oil prices, average production costs, and prorationing by the Texas Railroad Commission. These modifications enable us to generate a model that accounts for most of the variation in oil production in the lower 48 states between 1938 and 1991. The result that oil production in the lower 48 states shares stochastic trends with real oil prices, average production costs, and prorationing indicates that accuracy of Hubbert's bell shaped curve is fortuitous. The importance of these factors also indicates why the basic Hotelling model cannot replicate the production path for oil in the lower 48 states. This inability is critical. The negative economic effects associated with high prices and energy shortages imply that the importance of inconsistencies with the basic Hotelling model identified by this analysis may be sufficient to warrant a greater degree of government intervention in the transition from oil than is currently envisioned by most policy makers.

Keywords

oil production US empirical model oil prices Hotelling model Hubbert curve oil policy

Get full access to this article

View all access options for this article.

References

Adelman

(1964). “Efficiency of resource use include petroleum.” Southern Economic Journal 31: 101-122.

Byrd

L.T.

Kumar

R.M.

Williams

A.F.

Moore

D.L.

(1985). “US oil and gas finding and development costs, 1973-1982—lower 48 onshore and offshore.” Journal of Petroleum Technology 37: 2040-2048.

Cleveland

C.J.

(1991). “Physical and economic aspects of resource quality: the cost of oil supply in the lower 48 United States, 1936-1988.” Resources and Energy 13: 163-188.

Cleveland

C.J.

Kaufmann

R.K.

(1991). “Forecasting ultimate oil recovery and its rate of production: Incorporating economic forces into the models of M. King Hubbert.” The Energy Journal 12(2): 17-46.

Campbell

C.J.

Laherrere

J. H.

(1998). “The end of cheap oil.” Scientific American. March: 78-83.

Cuthbertson

Hall

S.G.

Taylor

M.P.

(1992). Applied Econometric Techniques. Ann Arbor, Michigan: University of Michigan Press.

Dickey

D. A.

Fuller

W.A.

(1979). “Distribution of the estimators for auto regressive time series with a unit root.” Journal of American Statistics Association 7: 427-431.

Enders

(1995). Applied Econometric Time Series. New York, NY: John Wiley.

Engle

R.E.

Granger

C.W.J.

(1987). “Cointegration and error correction: representation, estimation, and testing.” Econometrica 55: 251-276.

10.

Fisher

A.C.

(1981). Resource and Environmental Economics Cambridge, UK: Cambridge University Press.

11.

Frankel

P.H.

(1946). Essentials of Petroleum. London, UK: Frank Cass.

12.

Gately

(1992). “Imperfect price-reversibility of U.S. gasoline demand: Asymmetric responses to price increases and declines.” The Energy Journal 13(4): 179-207.

13.

Granger

C.W.J

Newbold

(1974). “Spurious regressions in econometrics.” Journal of Econometrics 2: 111-120.

14.

Greenslade

J.V.

Hall

S.G.

Henry

S.G.B.

(1997). “On the identification of cointegrated systems in small samples: practical procedures with an application to UK wages and prices.” London Business School, Mimeo.

15.

Hansen

Juselius

(1995). “CATS in RATS: Cointegration Analysis of Time Series.” Discussion paper, Estima, Evanston, Illinois.

16.

Harris

(1977). “Conventional crude oil resources of the United States: recent estimates, methods, for estimation and policy considerations.” Materials and Society 1: 263-286.

17.

Hotelling

(1931). “The economics of exhaustible resources.” Journal of Political Economy 39(2): 137.

18.

Hubbert

M. K.

(1956). “Nuclear energy and the fossil fuels.”In: American Petroleum Institute (Editor), Drilling and Production Practice. New York: API.

19.

Hubbert

M. K.

(1962). “Energy Resources. A Report to the Committee on Natural Resources,” National Academy of Sciences. Government Printing Office. Publication No. 1000-D.

20.

Hubbert

M.K.

(1982). “Techniques of prediction as applied to the production of oil and gas.”In:Oil and Gas Supply Modelling. S. Gass (editor). National Bureau of Standards, Special publication 631, Washington DC. p.16-141.

21.

Johansen

(1988). “Statistical analysis of cointegration vectors.” Journal of Economic Dynamics and Control 12: 231-254.

22.

Johansen

Juselius

(1990). “Maximum likelihood estimation and inference on cointegration with application to the demand for money.” Oxford Bulletin of Economics and Statistics 52: 169-209

23.

Johansen

Juselius

(1994). “Identification of the long-run and the short ran structure: an application to the ISLM model.” Journal of Econometrics 63: 7-36.

24.

Kaufmann

R.K.

(1991). “Oil production in the lower 48 states: Reconciling curve fitting and econometric models.” Resources and Energy 13:111-127.

25.

Kerr

(1998). “The next oil crisis looms large-and perhaps close.” Science 281: 1128-1131.

26.

Kim

Schmidt

(1990). “Some evidence on the accuracy of Phillips-Perron tests using alternative estimates of nuisance parameters.” Economics Letters 34: 345-350.

27.

Krautkraemer

J.A.

(1998). “Nonrenewable resource scarcity.” Journal of Economic Literature 36(4): 2065-2107.

28.

Menard

H.W.

Sharman

(1975). “Scientific uses of random drilling models.” Science 190: 337-343.

29.

Osterwald-Lennum

(1992). “A note with quantiles of the asymptotic distribution of the maximum likelihood cointegration rank test statistics.” Oxford Bulletin of Economics and Statistics 54: 461-471.

30.

Pantula

S.G.

(1989). “Testing for unit roots in time series data.” Econometric Theory 5: 256-271.

31.

Pearce

D.W.

Turner

R.K.

(1990). Economics of Natural Resources and the Environment. Baltimore, MD: The Johns Hopkins University Press.

32.

Pesaran

M.H.

Samiei

(1995). “Forecasting ultimate resource recovery.” International Journal of Forecasting 11(4): 543-555.

33.

Pesaran

M.H.

Shin

(1994). “Long mn structural modelling.” University of Cambridge, Mimeo.

34.

Prindle

D.F.

(1981). Petroleum Politics and the Texas Railroad Commission. Austin, TX: University of Texas Press.

35.

Ryan

J.H.

(1965). “National academy of sciences report on energy resources: discussion of limitations on logistic projections,” Bulletin of the American Association of Petroleum Geologists 49(1): 1713-1720.

36.

Schwert

G. W.

(1989). “Tests for unit roots: a Monte Carlo investigation,” Journal of Business and Economic Statistics 7: 147-159.

37.

Tietenberg

(2000). Environmental and Natural Resource Economics. Reading: Addison-Wesley.

38.

Traill

Colman

Young

(1978). “Estimating irreversible supply functions.” American Journal or Agricultural Economics 60: 528-531.

39.

Uri

N.D.

(1980). “Crude oil appraisal of the United States.” The Energy Journal 1(3): 65-75

40.

Wolffram

(1971). “Positivistic measures of aggregate supply elasticities: Some new approaches-some critical notes.” American Journal of Agricultural Economics 53: 356-359.