Investment in New Proved Oil Reserves: An Austrian Perspective

Bradley T. Ewing, Mark Thornton, Mark Yanochik

Research output: Contribution to journalArticlepeer-review

Abstract

Exploration and production (E&P) companies must replace oil produced with new proved reserves in order to sustain their existence, generate future revenues and value. Extensions constitute the largest type of additions to new proved reserves. Adding reserves through extensions is capital intensive and both the real price of oil (represented by real refiner acquisition cost) and real interest (represented by real yield on 10 year Treasury bond) will influence the investment in new discoveries of proved reserves. However, recent periods of unusually high commodity prices and ultra-low interest rates, often linked to monetary policy, may have led to an over-investment in reserves through extensions. Accordingly, using U.S. data (1977-2014) we test for the existence of "explosive behavior" in the volume of extensions over time with financial time series econometric methods referred to as right-tail ADF tests which have traditionally been used for identifying speculative bubbles in asset markets. Empirical evidence identifies a period of explosive ("bubble-like") behavior in the time series of extensions having occurred beginning 2010 through 2014. This research provides an Austrian explanation for the empirical results consistent with the notion of malinvestment.

Original languageEnglish
Article number20160017
JournalJournal of Business Valuation and Economic Loss Analysis
Volume12
Issue numbers1
DOIs
StatePublished - 2017

Keywords

  • Malinvestment
  • New
  • Proved
  • Reserves

Fingerprint Dive into the research topics of 'Investment in New Proved Oil Reserves: An Austrian Perspective'. Together they form a unique fingerprint.

Cite this