Understanding Oil Cycle Dynamics to Design the Future Economy
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ORIGINAL PAPER
Understanding Oil Cycle Dynamics to Design the Future Economy Luis Enrique Garcia1 · Aude Illig2 · Ian Schindler3 Received: 28 January 2020 / Revised: 5 September 2020 / Accepted: 29 September 2020 © Springer Nature Switzerland AG 2020
Abstract In this work, we make the ansatz that economic production is reduced to the energy made available to the economy. In (Illig and Schindler, BioPhys Econ Resour Qual 2(1):1, 2017) 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.
Introduction Does economic growth cause energy production 1 or is economic production enabled by energy production? Ayres and Warr (Ayres and Warr 2009) suggested that economic growth was a function of technological innovation, regarding energy applied to the production process, although authors such as (Solow 1956; Romer 1986; Romer 1990) belong‑ ing to the neoclassical economic mainstream considered that energy growth was exogenous, that is, they did not take energy flows into account as an explanation of the produc‑ tion process. They assumed that economic growth is per‑ petual and in equilibrium. Economic agents were assumed rational and able to process relevant information about the economic system. This led to a great confidence in mar‑ kets: if there is a shortage of energy, the price will rise and the market will find an optimal solution in the Pareto sense (Pukite 2012, p. 16).
* Ian Schindler ian.schindler@tse‑fr.eu 1
Section of Post Graduate Studies and Research, ESE, IPN, Mexico, Mexico
2
CeReMath, University of Toulouse 1, Capitole, Toulouse, France
3
Toulouse School of Economics, CeReMath, Institut Mathématique de Toulouse, CNRS UMR 5219, University of Toulouse 1, Capitole, Toulouse, France
However, there are other authors who consider that the production of energy (conversion of energy efficiency to use‑ ful work) is an endogenous variable that explains the growth applied to economic production, among which are (Cantillon 1755; Jevons 1866; Meadows 1974; Mollison and Holmgren 1978; Fraser and Rimas 2011; Reynolds 2002; Montgom‑ ery 2007; Hamilton 2009; Ayres and Warr 2009; Kümmel 2011,Montgomery, 2007,Hamilton 2013; Illig and Schindler 2017; Charlez 2017; Schindler and Schindler 2018; Hall and Kittgard 2018). In (Diamond 1998; Wolfson 2002), the authors attribute a la
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