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Investment in New Proved Oil Reserves: An Austrian Perspective

Author

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  • Ewing Bradley T.

    (Texas Tech University, 2500 Broadway, Lubbock, TX 79409, USA)

  • Thornton Mark

    (Ludwig Von Mises Institute, Auburn, AL, USA)

  • Yanochik Mark

    (Department of Finance and Economics, Georgia Southern University, College of Business P.O. Box 8152, Statesboro, GA 30460, USA)

Abstract

Exploration and production (E&P) companies must replace oil produced with new proved reserves in order to sustain their existence, generate future revenues and value. Extensions constitute the largest type of additions to new proved reserves. Adding reserves through extensions is capital intensive and both the real price of oil (represented by real refiner acquisition cost) and real interest (represented by real yield on 10 year Treasury bond) will influence the investment in new discoveries of proved reserves. However, recent periods of unusually high commodity prices and ultra-low interest rates, often linked to monetary policy, may have led to an over-investment in reserves through extensions. Accordingly, using U.S. data (1977–2014) we test for the existence of “explosive behavior” in the volume of extensions over time with financial time series econometric methods referred to as right-tail ADF tests which have traditionally been used for identifying speculative bubbles in asset markets. Empirical evidence identifies a period of explosive (“bubble-like”) behavior in the time series of extensions having occurred beginning 2010 through 2014. This research provides an Austrian explanation for the empirical results consistent with the notion of malinvestment.

Suggested Citation

  • Ewing Bradley T. & Thornton Mark & Yanochik Mark, 2017. "Investment in New Proved Oil Reserves: An Austrian Perspective," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 12(s1), pages 1-9, July.
    • Handle: RePEc:bpj:jbvela:v:12:y:2017:i:s1:p:9:n:5
    DOI: 10.1515/jbvela-2016-0017
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    References listed on IDEAS

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    3. Kräussl, Roman & Lehnert, Thorsten & Martelin, Nicolas, 2016. "Is there a bubble in the art market?," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 99-109.
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