Nature of firm expectations in petroleum exploration

Abstract

Recent interest in the state of the United States domestic petroleum industry has resulted in an increased concern regarding the ability of current large- scale econometric models to provide useful predictions about supply price sensitivity and about the effects of differing policy options on future supply. The petroleum industry's exploration and reserve response functions appear to have eluded traditional modeling approaches. Properties of firm exploration behavior are obscured when highly aggregated data are used. Data pertaining to different geographical areas are frequently combined using dummy variables to denote characteristics peculiar to a region. In these models price tends to be more related to the quality of the crude oil than to incremental costs of exploration and development of individual deposits. The effect of price changes on expected supplies is clearly moderated by the level of resource depletion for a particular basin. A major obstacle to carrying out a less aggregated analysis has been the lack of data on specific basins, but another obstacle has been the belief that field behavior is too erratic to model successful.