The Impact of Oil Price on Additions to U.S. Proven Reserves

27 Pages Posted: 14 Nov 2000

See all articles by Y. Hossein Farzin

Y. Hossein Farzin

University of California, Davis - Department of Agricultural and Resource Economics; Oxford Centre for the Analysis of Resource Rich Economies (OxCarre)

Abstract

Departing from Hotelling's assumption of fixed and known reserves, this paper develops an economic model of additions to proven reserves that explicitly incorporates the effects of expected resource price, cumulative reserves development, and technological progress on reserve additions. The model treats additions to proven oil reserves as output of a production process in which drilling wells is a primary input to transform some of oil-in-place into the economic category of proven reserves. Application of the model to U.S. data for the1950-1995 period provides strong statistical support for the existence of all the three salient effects. We obtain an estimate of the price elasticity of reserve additions (absent from previous studies) which, although statistically highly significant, is rather small. Using this price elasticity estimate, it is shown that if in the face of steady economic growth, and hence oil consumption, U.S. oil import dependence is to be kept from rising in the future, ceteris paribus, a steady oil price increase in the range of 1.5 to 4.5 percent a year is essential.

Key Words: reserves additions, price effect, depletion, technological progress, oil dependence

JEL Classification: C5, H3, Q31, Q41

Suggested Citation

Farzin, Y. Hossein, The Impact of Oil Price on Additions to U.S. Proven Reserves. Available at SSRN: https://ssrn.com/abstract=246686 or http://dx.doi.org/10.2139/ssrn.246686

Y. Hossein Farzin (Contact Author)

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-7610 (Phone)
530-752-5614 (Fax)

HOME PAGE: http://farzin.ucdavis.edu/

Oxford Centre for the Analysis of Resource Rich Economies (OxCarre) ( email )

University of Oxford, Department of Economics
Manor Road
Oxford, OX1 4AU
United Kingdom

HOME PAGE: http://www.oxcarre.ox.ac.uk

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