Modeling Peak Oil

Peak oil” refers to the future decline in world production of crude oil and to the accompanying potentially calamitous effects. The majority of the literature on peak oil is non-economic and ignores price effects even when analyzing policies. Unfortunately, most economic models of depletable resources do not generate production peaks. I present four models which generate production peaks in equilibrium. Production increases in the models are driven by: demand increases, cost reductions through advancing technology, cost reductions through reserve additions, and production capacity increases through site development. Production decreases are driven by scarcity. The models do not rely on market failures and indicate that a peak in production may arise from efficient intertemporal optimization. The models shows that prices are a better indicator of impending scarcity than peaking is and that peak production can occur when any percentage from 0-100% of the original deposit remains. JEL codes: Q3 and Q4.