Enduring Feedback Structure and Long‐term Futures for the Upstream Oil Industry

Abstract

A fundamental idea in system dynamics is that interdependencies in business and society significantly influence the performance over time of firms and industries. This idea is often summarized in the phrase ‘feedback structure gives rise to dynamic behaviour’. But what if the time horizon of a modelling study spans decades, as is often the case in models of natural resource management? Is it possible to find enduring feedback structures that shape events over such long periods? An example is presented based on a well‐known system dynamics model of the upstream oil industry. The model was originally developed in the late 1980s and subsequently updated. The model's structure is reviewed against the backdrop of recent expansion in US shale oil production. Shale oil is undoubtedly a major technology breakthrough in oil recovery. However, this change pales in significance, when seen against the backdrop of strong and enduring feedback processes that coordinate production in the Organization of Petroleum Exporting Countries (OPEC). Simulations show that OPEC retains the power to control oil price, dominate global production and drive commercial producers (including frackers) out of the industry. Further simulations test the so‐called ‘Saudi America’ hypothesis and reveal that US frackers could not plausibly displace Saudi Arabia as the oil industry's swing producer. Copyright © 2017 John Wiley & Sons, Ltd.