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VALUING PETROLEUM RESERVES USING CURRENT NET PRICE
Author(s) -
Davis Graham A.,
Cairns Robert D.
Publication year - 1999
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1999.tb01431.x
Subject(s) - economics , valuation (finance) , value (mathematics) , production (economics) , microeconomics , upper and lower bounds , present value , econometrics , oil price , petroleum , natural resource economics , monetary economics , mathematics , geology , statistics , mathematical analysis , paleontology , finance
Miller and Upton propose the “Hotelling Valuation Principle”: producing mineral reserves can be valued by multiplying the mineral's current net price by the reserve estimate. 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 we incorporate uncertainty and production constraints and find that the Hotelling value is a theoretical upper bound on value. We also find that a modified net price rule approximates reserve value. ( JEL Q41, G13, G12)