Valuing Petroleum Reserves Using Current Net Price

Graham Davis and Robert Cairns

Economic Inquiry, 1999, vol. 37, issue 2, 295-311

Abstract: Merton H. Miller and Charles W. Upton propose the 'Hotelling Valuation Principle': producing mineral reserves can be valued by multiplying the mineral's current net price by the reserve estimate. M. A. Adelman argues that, by omitting production constraints, the Hotelling value provides an upper bound on oil reserve value. Others claim oil reserves are options on oil, with the Hotelling value being a lower bound on their value. In an optimizing model of oil production, the authors incorporate uncertainty and production constraints and find that the Hotelling value is a theoretical upper bound on value. They also find that a modified net price rule approximates reserve value. Copyright 1999 by Oxford University Press.

Date: 1999
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