Global oil production during the transition to net-zero
Ryan Kellogg, in this paper, develops a dynamic equilibrium model to analyze how global oil producers might respond to an anticipated long-term decline in global oil demand, potentially falling to near zero by the end of the century due to clean energy advances and climate policies.
Methodology:
The model integrates two opposing effects on oil supply when future demand is expected to decline:
- The green paradox: producers accelerate extraction now to sell before demand falls, potentially increasing near-term emissions.
- Disinvestment effect: anticipation of lower future demand discourages new investments in oil production capacity, reducing near-term extraction and emissions.
It extends Hotelling’s exhaustible resource framework by focusing on investment timing rather than extraction timing, incorporating industry realities such as:
- Heterogeneous producers (core OPEC, non-core OPEC+, conventional non-OPEC, shale oil).
- Market power exercised by core OPEC producers.
- Increasing marginal drilling costs with investment rate.
- Production decline rates varying by resource type.
The model is calibrated using 2023 data on production, reserves, investment costs, discount rates, and demand elasticities from academic and industry sources. Simulations compare scenarios where producers anticipate the full demand decline over 75 years versus scenarios where demand declines are unanticipated, isolating the net effect of anticipation on cumulative drilling and extraction.
Key findings:
- In the reference case, an anticipated demand decline reduces cumulative global oil extraction by 27.1% relative to a baseline with no demand decline, leaving significant oil reserves unextracted.
- Anticipation of demand decline further reduces cumulative extraction by 4.8% compared to an unanticipated decline, indicating that the disinvestment effect outweighs the green paradox overall.
- Core OPEC (low discount rate, market power) exhibits a green paradox effect, increasing near-term extraction. Non-core OPEC+ and conventional non-OPEC producers show strong disinvestment effects due to long-lived investments and low initial scarcity rents.
- Shale oil shows minimal anticipation effects because of short-lived investments and small scarcity rents.
- Sensitivity analyses reveal:
– Longer-lived investments strengthen disinvestment effects.
– Larger reserves reduce scarcity rents and weaken the green paradox.
– Faster demand declines intensify disinvestment.
– Market power modestly slows extraction but does not reverse the dominance of disinvestment.
– Delays in demand decline onset can temporarily increase near-term investment and lower prices, consistent with some empirical observations.
- For a strong green paradox to dominate, investments must be very short-cycle and discount rates uniformly low across all producers, conditions deemed unlikely.
Conclusion:
The study concludes that, under empirically supported parameters, oil producers’ anticipation of a long-run demand decline leads primarily to disinvestment and reduced cumulative extraction, mitigating concerns about the green paradox accelerating emissions. The model highlights the importance of investment horizons, discount rates, and market structure in shaping oil supply responses to the energy transition.
The End of Oil
Author: Ryan Kellogg
From: University of Chicago
How peak oil demand could reshape global markets
This article by Matthew Higgins and Thomas Klitgaard examines the implications of “peak oil demand”—the point at which global oil consumption stops rising and begins to plateau or decline—on global oil markets. Some of the findings include:
- Emerging market demand slowing: While oil consumption in emerging market economies (EMEs), particularly China, has driven global demand growth in recent years, this growth is now slowing. Chinese oil consumption growth has decelerated, and similar trends are observed in other EMEs.
- Zero-sum market dynamics: The arrival of peak demand would transform the global oil market into a zero-sum game. In this scenario, any supply increase from one region or producer would simply push prices down, forcing equivalent production cuts or declines elsewhere, with the highest-cost producers likely to be pushed out of the market.
- Price outlook and volatility: Although peak demand would put downward pressure on prices, oil prices will not necessarily trend lower indefinitely. Prices will continue to fluctuate due to factors like geopolitical events, OPEC decisions, and business cycles. There is also a price floor, as prices must remain high enough to incentivize necessary supply.
- Impact on U.S. and non-Middle East producers: U.S. oil producers generally require higher prices ($61–$70 per barrel WTI) to profitably drill new wells, compared to much lower breakeven costs in the Middle East. This makes producers outside the Middle East, including those in the U.S., more vulnerable to future price declines in a peak demand environment.
Conclusion:
A shift from rising to flat or declining global oil demand would fundamentally change the competitive landscape, pressuring prices and making high-cost producers more vulnerable. While oil will remain a significant energy source for years, the market will be shaped by slower demand growth, ongoing price volatility, and increased competition among producers.
Will Peak Demand Roil Global Oil Markets?
By: Matthew Higgins, Thomas Klitgaard – Federal Reserve Bank of New York
