Optimal Oil Extraction as a multiple Real Option
AbstractWe study optimal oil extraction strategy and the value of an oil field using a multiple real option appraoch. Extracting a barrel of oil is similar to exercising a call option and optimal strategies lead to deferring production when oil prices are low and when volatility is high. We sow that, in theory, the net present alue ofa country's oil reserves is increased significantly (by 100 percent, in the most extreme case) if production decisions are made conditional on oil prices. We also show that the marginal value ofaditional capacity is higher for countries with bigger resources and longer production horizons. We apply the model to Brazil and the U>A>E> in order to pin down two points of the global supply curve.
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Bibliographic InfoPaper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 064.
Date of creation: 2011
Date of revision:
Oil production; Real Options; Capacity Expansion; Stochastic Optimization;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-CWA-2011-10-09 (Central & Western Asia)
- NEP-ENE-2011-10-09 (Energy Economics)
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