Oil production in the lower 48 states: Economic, geological, and institutional determinants

In this paper, we establish an empirical model for oil production in the lo wer 48 states that represents its economic, physical, and institutional det erminants. We estimate a vector error correction model for oil production i n the lower 48 states that specifies real oil prices, average production co sts, and prorationing by the Texas Railroad Commission. These modifications enable us to generate a model that accounts for most of the variation in o il production in the lower 48 states between 1938 and 1991. The result that oil production in the lower 48 states shares stochastic trends with real o il prices, average production costs, and prorationing indicates that accura cy of Hubbert's bell shaped curve is fortuitous. The importance of these fa ctors also indicates why the basic Hotelling model cannot replicate the pro duction path for oil in the lower 48 states. This inability is critical. Th e negative economic effects associated with high prices and energy shortage s imply that the importance of inconsistencies with the basic Hotelling mod el identified by this analysis may be sufficient to warrant a greater degre e of government intervention in the transition from oil than is currently e nvisioned by most policy makers.