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Valuing Petroleum Reserves Using Current Net Price

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  • Davis, Graham A
  • Cairns, Robert D

Abstract

Merton H. Miller and Charles W. Upton propose the 'Hotelling Valuation Principle': producing mineral reserves can be valued by multiplying the mineral's current net price by the reserve estimate. M. A. Adelman argues that, by omitting production constraints, the Hotelling value provides an upper bound on oil reserve value. Others claim oil reserves are options on oil, with the Hotelling value being a lower bound on their value. In an optimizing model of oil production, the authors incorporate uncertainty and production constraints and find that the Hotelling value is a theoretical upper bound on value. They also find that a modified net price rule approximates reserve value. Copyright 1999 by Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 37 (1999)
Issue (Month): 2 (April)
Pages: 295-311

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Handle: RePEc:oup:ecinqu:v:37:y:1999:i:2:p:295-311

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Citations

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Cited by:
  1. Cairns, Robert D., 2014. "The green paradox of the economics of exhaustible resources," Energy Policy, Elsevier, vol. 65(C), pages 78-85.
  2. Andrew Leach & Charles F. Mason & Klaas van't Veld, 2009. "Co-optimization of Enhanced Oil Recovery and Carbon Sequestration," NBER Working Papers 15035, National Bureau of Economic Research, Inc.
  3. Bazhanov, Andrei, 2008. "Sustainable growth: Compatibility between criterion and the initial state," MPRA Paper 9914, University Library of Munich, Germany.
  4. Bazhanov, Andrei, 2008. "Sustainable growth: The extraction-saving relationship," MPRA Paper 9911, University Library of Munich, Germany.
  5. Bazhanov, Andrei, 2008. "Inconsistency between a criterion and the initial conditions," MPRA Paper 6792, University Library of Munich, Germany.
  6. Bazhanov, Andrei, 2008. "Sustainable growth in a resource-based economy: the extraction-saving relationship," MPRA Paper 12350, University Library of Munich, Germany.
  7. Bazhanov, Andrei V., 2010. "Sustainable growth: Compatibility between a plausible growth criterion and the initial state," Resources Policy, Elsevier, vol. 35(2), pages 116-125, June.
  8. Davis, Graham A., 2001. "The Credibility of a Threat to Nationalize," Journal of Environmental Economics and Management, Elsevier, vol. 42(2), pages 119-139, September.
  9. Livernois, J. & Thille, H. & Zhang, X., 2003. "A Test of the Hotelling Rule Using Old-Growth Timber Data," Working Papers 2003-4, University of Guelph, Department of Economics and Finance.
  10. Bazhanov, Andrei, 2007. "Switching to a sustainable efficient extraction path," MPRA Paper 2976, University Library of Munich, Germany.
  11. Davis, Graham A. & Cairns, Robert D., 2012. "Good timing: The economics of optimal stopping," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 255-265.

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