skip to primary navigationskip to content

Energy commodity price dynamics

Energy commodity price dynamics in FTT

The consumption of non-renewable resources is not well described by cost-supply (or cost-quantity) curves. This is because the value of exhaustible resources lying in the ground is ambiguous and depends on the market. For instance, the owner of an untapped oil field can decide to begin exploitation, or to wait for a time when he thinks the price oil will be higher. Thus the consumption does not progress starting from lowest cost resources necessarily, but is more complex to predict. Details of this model are given in [1].
As one can observe, for instance in the case of oil, all kinds of exploitation schemes exist using different types of oil occurrences (e.g. Middle-East oil, deep offshore rigs, oil sands, heavy oil, etc). All of these have widely different exploitation costs, but some (but not all) occurrences of all these types are used simply because they are considered economic given the current price of oil, which is high enough to make that possible. 
Non-renewable resources are generally classified as reserves, which are known and known to be economic to exploit, and resources, which are uncertain but thought uneconomic to exploit given the current price of the associated energy commodity (gas, coal, uranium etc). A boundary separates these two classifications, which is defined by the price of the commodity. Resources and reserves are revised every year, and as reserves are gradually consumed, lower cost resources are gradually reclassified as reserves. Thus there is a flow of resources towards reserves. 
This can be simulated in a model, given quantities of resources and reserves and a demand for energy commodities. We start from a distribution of energy resources classified according to their exploitation cost, in a number of ranges (a). The limit between reserves and resources can be thought as a cost threshold separating the two (red curve), which can move up or down as the price changes. Reserves in all cost ranges are gradually consumed, and the lower and lower amounts left reduces the supply, and forces some lower cost resources to be reclassified as reserves, moving the red curve gradually to the right (b). 

[1] J.-F. Mercure and P. Salas, On the global economic potentials and marginal costs of non-renewable resources and the price of energy commodities, Energy Policy
Open Access: 
Also available on ArXiv arXiv:1209.0708 [q-fin.GN]
4cmr logo large and transparent

4CMR has finished its cycle, and has been replaced by the Cambridge Centre for Environment, Energy and Natural Resource Governance (C-EENRG). C-EENRG is also located in the Department of Land Economy, with a core mission to "conduct integrative research on the governance of environmental transitions, understood as social and technological processes driven by environmental constraints that lead to fundamental changes in social organisation."

Read more