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Simple Analytics of Valuing Producing Petroleum Reserves

Abstract:
We modify the approach to valuing mineral reserves that is current in economic literature by considering a net present-value rule under uncertainty. Direct application of Hotelling's rule is found to be inappropriate. The modification is such that the present value is approximately half that proposed by the Hotelling Valuation Principle.

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Energy Specializations: Petroleum – Exploration and Production; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Exploration and Production

JEL Codes:
D24 - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Oil prices, Hotelling model, oil reserve valuation, oil production

DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No4-6


Published in Volume19, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.