How Does Economic Theory Explain the Hubbert Peak Oil Model?

Abstract

This article compares the advantages and limits of the two main methods used in the literature to model oil production: the technical Hubbert approach and the economic Hotelling approach. We argue that the technical approach can be nested in the economic approach by showing that a technical or geological constraint can be reinterpreted as a cost constraint. This provides an economic foundation for Hubbert’s peak oil model. As profitability is the main driver behind production plans, we show that changes in profitability due to divergent trajectories between costs and oil price may give rise to a Hubbert production curve. For this result we do not need to introduce a decreasing cost effect as is generally assumed in the literature.