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Simple Analytics of Valuing Producing Petroleum Reserves

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: Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q35: Hydrocarbon Resources, Q41: Energy: Demand and Supply; Prices, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, Q47: Energy Forecasting

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 bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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