Abstract
The gradual exhaustion of existing deposits of a depletable non-renewable resource such as oil tends to shift the supply price curve of the resource upwards, increasing its marginal cost. Advances in technologies for exploration and production act as a brake on such upward shifts. Thus, there is a tug-of-war between the gradual exhaustion of existing deposits and technological progress. Using a recently developed constrained least-squares regression technique, we demonstrate that technological progress was the dominant force of the two during the first part of this century, causing a secular drop in marginal costs, but that this situation eventually was reversed, and that the gradual exhaustion of deposits gained the upper hand, causing marginal costs to increase. The turning point occurred around 1971–72. We also discuss the forecasting of the possible current upward drift of marginal costs.
Similar content being viewed by others
References
M.A. Adelman, Finding-development costs in the United States 1918–1988, in:Advances in the Economics of Energy and Resources, J.R. Moroney, ed., JAI Press, Greenwich, Connecticut, 1991.
M.A. Adelman, USA oil/gas production cost: Recent changes, Energy Economics 13(1991) 235–237.
D.R. Bohi and M.A. Toman,Analyzing Nonrenewable Resource Supply, Resources for the Future, Washington, DC, 1984.
S.L. McDonald and S. Thore, Measuring and implementing the security premium on imported oil with depleting resource base, presented atSociety of Petroleum Engineers Symposium on Energy, Finance and Taxation Policies, Washington, DC, September 1988; reprinted in theProceedings of the symposium, 1988.
S.L. McDonald and S. Thore, Auctioned quotas to limit U.S. imports, Journal of Petroleum Technology 41(1989)1332–1334. See also: Authors' reply to discussion of auctioned quotas to limit U.S. imports, Journal of Petroleum Technology 42(1990)101–102.
D. Epple and J. Londregan, Strategies, for modeling exhaustible resource supply, in:Handbook of Natural Resource and Energy Economics, Vol. 3, A.V. Kneese and J.L. Sweeney, eds., Elsevier Science, 1993.
L.L. Lamberton, Developing oil and gas worldwide, The Lamp (1992) 1–4.
N. Ritchey, Semi-linear programming and the unidimensional similarities problem, Dissertation, Carnegie Mellon University, Pittsburgh, PA, 1989.
S. Thore, A constrained least-squares method for estimating the effects of an unknown monotonically intervening factor, Journal of Forecasting 7(1989)369–379.
S. Thore and R. Gonzalez, On the determination of the equilibrium price of oil, presented at the10th North American Conference of the International Association for Energy Economics, Houston, October 1988; published in theProceedings of the conference.
S. Thore, T. Ruefli and K.K. Sinha, Estimation of the time path of the supply price of an exhaustible resource: The case of oil and natural gas, presented at theTIMS/ORSA Meeting, New York, October 1989.
S. Thore, G. Xia and T. Song, Irreversible technological progress and innovations: Endogeneous estimation of discrete shift variables, presented at theGeorgia Productivity Workshop, University of Georgia, Athens, October 1994; submitted to Journal of Productivity Analysis.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Thore, S., McDonald, S.L., Gonzalez, R. et al. The time path of the marginal cost of oil: The turning point and the subsequent upward drift. Ann Oper Res 68, 409–422 (1996). https://doi.org/10.1007/BF02207224
Issue Date:
DOI: https://doi.org/10.1007/BF02207224