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Efforts and Efficiency in Oil Exploration: A Vector Error-Correction Approach

High oil prices and gradual resource depletion have raised global concerns for security of energy supply. Successful exploration activity is a critical factor for future oil production. Based on standard neoclassical producer behavior and modern time series econometrics, this study reveals new insights into the process of oil and gas exploration. I find that reserve additions are enhanced by an increase in the oil price, due to responses both in effort and efficiency of exploration. Moreover, oil companies accept higher exploration risk in response to an oil price increase, implying lower success rates and higher expected discovery size.

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Energy Specializations: Petroleum – Exploration and Production; Petroleum – Policy and Regulation

JEL Codes: Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q21: Renewable Resources and Conservation: Demand and Supply; Prices, Q41: Energy: Demand and Supply; Prices, Q24: Renewable Resources and Conservation: Land, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, C51: Model Construction and Estimation, Q35: Hydrocarbon Resources, C58: Financial Econometrics

Keywords: Oil exploration, industrial economics, econometrics, oil companies

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No4-3

Published in Volume 29, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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