| dc.description.abstract | Since the 2000s oil prices have become increasingly volatile, with exceptionally large price movements since 2007. A high price period in between 2010 and 2014 fostered rapid growth of unconventional oil, in particular of tight oil in the USA. Since 2014 crude oil prices have dropped significantly again, and remained low up to at least 2016 (i.e. up to this report). The TIMER model developed by PBL does not reflect this volatility, instead it assumes continued low prices, just above marginal costs of production.
This report investigates the mismatch between historic oil price dynamics since 2007, which is the latest year up to which TIMER is calibrated and the TIMER model. Through a literature study and semi-structured interviews insight is sought into which factors within TIMER are missing or which ones could be improved. From this list a number of key factors are selected, from which a system dynamic model is built to assess their impact. The identified factors resulted in the development of a model that assesses the following two factors:
1. The effects of increasing costs of discoveries and production of conventional oil, and;
2. The effects of rapid growth of unconventional oil and decreased price elasticity of demand on the price of oil.
Depletion in discoveries are expressed as an effort per yield function, derived from historical data. This shows that over time marginal discoveries increase in cost exponentially. Likewise decline in existing field production requires a growing amount of capital stock to meet demanded supply quantities. Price elasticity of demand is observed to decline over time, which is expressed using exponential decay. The influx of multiple types of unconventional oil is entered exogenously in the model, as is oil demand. The cost of production and market price of oil are produced endogenously. The model is run from 1980 to 2020. Results from the model show that growing production and exploration costs form the main driver behind the high price of oil in the period between 2010 and 2014. The influx of unconventional oil coupled with reduced price elasticity of demand resulted in the subsequent price crash.
By using marginal costs of exploration and production as described in this thesis, TIMER is able to shift away from using long term cost-supply curves to determine future costs of oil production. Long term cost-supply curves contain significant uncertainties as they are sensitive to variations in estimated future reserve additions. | |
