This is an update to the post An Empirical Model For Oil Prices and Some Implications in which we discussed a model for oil prices as a function of 3 years of production, that is oil price in year t was estimated by production in year t, the discrete first derivative of production in year t, and the discrete second derivative in year t. We subsequently published a paper titled Oil Extraction, Economic Growth, and Oil Price Dynamics using the same model. This article contains most of our intuition on how peak oil will effect oil prices. We believe in fact that peak oil is about extraction prices rising faster than market prices and hence lower profitability for the oil industry.
Before going on, we note that all available data is very approximate. Jean Laherrère has exhaustively documented incoherence in extraction data from all standard sources [1]. We use a single price of oil provided by BP, but there is a large spectrum of prices for oil of different densities, chemistry, and provenance [2]. For this reason we do not search a perfect fit but rather try to understand the dynamics creating oil demand.
Inspired by work of Gail Tverberg and Rune Likvern on interest rates and oil prices, we added interest rates to the independent variables. Without interest rates, we had an adjusted R squared of .55.
We used extraction and price data from BP. The interest rate is the average yearly rate of the U.S. Federal Reserve. The justification for using this rate is that we believe that the U. S. dollar is the currency of oil markets and the U.S. Fed rate is the effective rate for the oil business.
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