Garcia, Luis Enrique, Illig, Aude and Schindler, Ian (2020) Understanding oil cycle dynamics to design the future economy. Biophysical Economics and Sustainability, vol. 5 (n° 15).

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Abstract

In this work we make the ansatz that economic production is reduced to the exergy (energy) made available to the economy. In \citep{Illig2017} the price of oil was expressed as a function of the size of the economy, the cost share of oil, and the quantity of oil extracted. We clarify assumptions needed to use this explicit price equation to study prices. Using the current extraction rate, the previous year's extraction rate,and interest rates of the Federal Reserve we use linear regression to give a model for oil prices from 1966 to 2018. The model verifies that deductions made from the explicit price equation are consistent with empirical data over the given time period. Our analysis indicates that the contraction phase of world oil extraction began in 2020 and that it will be characterized by relatively low oil prices. We present some challenges and opportunities for building a future economy if our assumptions prove valid.