IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v34y2012i4p1226-1233.html
   My bibliography  Save this article

Oil exploration and perceptions of scarcity: The fallacy of early success

Author

Listed:
  • Jakobsson, Kristofer
  • Söderbergh, Bengt
  • Snowden, Simon
  • Li, Chuan-Zhong
  • Aleklett, Kjell

Abstract

It has been suggested that oil exploration may lead to false perceptions of decreasing scarcity. We perform a simulation of the exploration process using Bayesian updating. The approach enables us to isolate the information effect on the success rate and also to quantify the subjective expectation of the total resource size. The area under exploration consists of a number of regions which may differ in their oil content. Exploration is performed with the goal to maximize the expected success rate. The resulting information about the distribution of oil and the total resource size is assumed public knowledge. A number of scenarios with variations in the dimensions of the area under exploration, the oil distribution and initial beliefs are considered. The results indicate that the information effect on the success rate is significant but brief — it might have a considerable impact on price but is an unlikely mechanism behind a long-term declining price trend. However, the information effect on expectations is gradual and persistent. Since exploration is performed in regions where the expected success rate is the highest, the historical success rate will not be representative of the area as a whole. An explorer will tend to overestimate the total resource size, thereby suggesting an alternative mechanism for false perceptions of decreasing scarcity, a mechanism that could be called the “fallacy of early success”.

Suggested Citation

  • Jakobsson, Kristofer & Söderbergh, Bengt & Snowden, Simon & Li, Chuan-Zhong & Aleklett, Kjell, 2012. "Oil exploration and perceptions of scarcity: The fallacy of early success," Energy Economics, Elsevier, vol. 34(4), pages 1226-1233.
  • Handle: RePEc:eee:eneeco:v:34:y:2012:i:4:p:1226-1233
    DOI: 10.1016/j.eneco.2011.11.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988311002775
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chevillon, Guillaume & Rifflart, Christine, 2009. "Physical market determinants of the price of crude oil and the market premium," Energy Economics, Elsevier, vol. 31(4), pages 537-549, July.
    2. Reynolds, Douglas B., 1999. "The mineral economy: how prices and costs can falsely signal decreasing scarcity," Ecological Economics, Elsevier, vol. 31(1), pages 155-166, October.
    3. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
    4. Ellen, Saskia ter & Zwinkels, Remco C.J., 2010. "Oil price dynamics: A behavioral finance approach with heterogeneous agents," Energy Economics, Elsevier, vol. 32(6), pages 1427-1434, November.
    5. Mohammadi, Hassan & Su, Lixian, 2010. "International evidence on crude oil price dynamics: Applications of ARIMA-GARCH models," Energy Economics, Elsevier, vol. 32(5), pages 1001-1008, September.
    6. Alexander Kemp & Sola Kasim, 2006. "A Regional Model Of Oil And Gas Exploration In The Ukcs," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(2), pages 198-221, May.
    7. Cifarelli, Giulio & Paladino, Giovanna, 2010. "Oil price dynamics and speculation: A multivariate financial approach," Energy Economics, Elsevier, vol. 32(2), pages 363-372, March.
    8. Adelman, M A, 1990. "Mineral Depletion, with Special Reference to Petroleum," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 1-10, February.
    9. Deshmukh, Sudhakar D & Pliska, Stanley R, 1980. "Optimal Consumption and Exploration of Nonrenewable Resources under Uncertainty," Econometrica, Econometric Society, vol. 48(1), pages 177-200, January.
    10. Jesus Crespo Cuaresma & Adusei Jumah & Sohbet Karbuz, 2009. "Modelling and Forecasting Oil Prices: The Role of Asymmetric Cycles," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 81-90.
    11. Bardi, Ugo, 2005. "The mineral economy: a model for the shape of oil production curves," Energy Policy, Elsevier, vol. 33(1), pages 53-61, January.
    12. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 841-861, October.
    13. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-1225, December.
    14. Kesicki, Fabian, 2010. "The third oil price surge - What's different this time?," Energy Policy, Elsevier, vol. 38(3), pages 1596-1606, March.
    15. Russell S. Uhler, 1976. "Costs and Supply in Petroleum Exploration: The Case of Alberta," Canadian Journal of Economics, Canadian Economics Association, vol. 9(1), pages 72-90, February.
    16. Lizardo, Radhamés A. & Mollick, André V., 2010. "Oil price fluctuations and U.S. dollar exchange rates," Energy Economics, Elsevier, vol. 32(2), pages 399-408, March.
    17. Pesaran, M Hashem, 1990. "An Econometric Analysis of Exploration and Extraction of Oil in the U.K. Continental Shelf," Economic Journal, Royal Economic Society, vol. 100(401), pages 367-390, June.
    18. Mason, Charles F., 1985. "Learning from exploration information : The case of uranium," Resources and Energy, Elsevier, vol. 7(3), pages 243-257, September.
    19. M. Allais, 1957. "Method of Appraising Economic Prospects of Mining Exploration over Large Territories: Algerian Sahara Case Study," Management Science, INFORMS, vol. 3(4), pages 285-347, July.
    20. Richard J. Gilbert, 1979. "Optimal Depletion of an Uncertain Stock," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 47-57.
    21. Massimiliano Marzo & Paolo Zagaglia, 2010. "Volatility forecasting for crude oil futures," Applied Economics Letters, Taylor & Francis Journals, vol. 17(16), pages 1587-1599.
    22. Wirl, Franz, 2008. "Why do oil prices jump (or fall)?," Energy Policy, Elsevier, vol. 36(3), pages 1029-1043, March.
    23. Jing Li & Henry Thompson, 2010. "A Note on the Oil Price Trend and GARCH Shocks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 159-166.
    24. N. V. Quyen, 1991. "Exhaustible Resources: A Theory of Exploration," Review of Economic Studies, Oxford University Press, vol. 58(4), pages 777-789.
    25. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
    26. Glenn C. Loury, 1978. "The Optimal Exploitation of an Unknown Reserve," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 621-636.
    27. Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June.
    28. G. C. Watkins, 1992. "The Hotelling Principle: Autobahn or Cul de Sac?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-24.
    29. Fattouh, Bassam, 2010. "The dynamics of crude oil price differentials," Energy Economics, Elsevier, vol. 32(2), pages 334-342, March.
    30. Peterson, Frederick M., 1978. "A model of mining and exploring for exhaustible resources," Journal of Environmental Economics and Management, Elsevier, vol. 5(3), pages 236-251, September.
    31. Attanasi, E. D., 1981. "Exploration decisions and firms in the mineral industries," Energy Economics, Elsevier, vol. 3(2), pages 105-112, April.
    32. Özbek, Levent & Özlale, Ümit, 2010. "Analysis of real oil prices via trend-cycle decomposition," Energy Policy, Elsevier, vol. 38(7), pages 3676-3683, July.
    33. Kaufmann, Robert K. & Ullman, Ben, 2009. "Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices," Energy Economics, Elsevier, vol. 31(4), pages 550-558, July.
    34. Swierzbinski, Joseph E. & Mendelsohn, Robert, 1989. "Information and exhaustible resources: A Bayesian analysis," Journal of Environmental Economics and Management, Elsevier, vol. 16(3), pages 193-208, May.
    35. Bjorstad, Heidi & Hefting, Tom & Stensland, Gunnar, 1989. "A model for exploration decisions," Energy Economics, Elsevier, vol. 11(3), pages 189-200, July.
    36. Norgaard, Richard B., 1990. "Economic indicators of resource scarcity: A critical essay," Journal of Environmental Economics and Management, Elsevier, vol. 19(1), pages 19-25, July.
    37. Michael Hoel, 1978. "Resource Extraction, Uncertainty, and Learning," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 642-645, Autumn.
    38. Mason, Charles F., 1986. "Exploration, information, and regulation in an exhaustible mineral industry," Journal of Environmental Economics and Management, Elsevier, vol. 13(2), pages 153-166, June.
    39. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    40. Narayan, Paresh Kumar & Narayan, Seema & Popp, Stephan, 2011. "Investigating price clustering in the oil futures market," Applied Energy, Elsevier, vol. 88(1), pages 397-402, January.
    41. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
    42. Ramsey, James B., 1980. "The economics of oil exploration : A probability-of-ruin approach," Energy Economics, Elsevier, vol. 2(1), pages 14-30, January.
    43. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
    44. Andrew Pickering, 2002. "The Discovery Decline Phenomenon: Microeconometric Evidence from the UK Continental Shelf," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 57-71.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Okullo, Samuel J. & Reynès, Frédéric & Hofkes, Marjan W., 2015. "Modeling peak oil and the geological constraints on oil production," Resource and Energy Economics, Elsevier, vol. 40(C), pages 36-56.
    2. Reynolds, Douglas B., 2013. "Uncertainty in exhaustible natural resource economics: The irreversible sunk costs of Hotelling," Resources Policy, Elsevier, vol. 38(4), pages 532-541.
    3. Robert K. Kaufmann, 2014. "The End of Cheap Oil: Economic, Social, and Political Change in the US and Former Soviet Union," Energies, MDPI, Open Access Journal, vol. 7(10), pages 1-17, September.
    4. Reynolds, Douglas B., 2014. "World oil production trend: Comparing Hubbert multi-cycle curves," Ecological Economics, Elsevier, vol. 98(C), pages 62-71.

    More about this item

    Keywords

    Oil exploration; Success rate; Expectation bias; Bayesian updating; U-shaped price path;

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:34:y:2012:i:4:p:1226-1233. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.