The Oil Drum

42 comments on The Extraction of Exhaustible Resources

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westexas on January 4, 2006 - 1:45am

In my corner of the Oil Patch in West Central Texas, I have in fact been arguing for lower production rates and larger spacing in new discoveries. We are in a very mature area, basically looking for missed fields.

However, the fields can be quite profitable, including one that I found with recoverable reserves of 5 million BOE. Of course, we are nothing but a rounding error in the global energy scene.

I'm not in rush to get the money for two reasons: (1) I think oil prices are going to skyrocket and (2) I'm not sure that we can profitably invest the money anyway, given the mature area that we are in.

I suspect that a lot of energy exporters are going to gradually reach the same conclusion. Why should they rush to sell depleting energy assets when they can sell less energy for more money in future years?

It has also been my contention for some time that the only true capital is measured in BTU's. The Fed can inflate the money supply from here to the moon, but it won't create one BTU of energy.

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mcain6925 on January 4, 2006 - 2:05pm

I suspect that a lot of energy exporters are going to gradually reach the same conclusion. Why should they rush to sell depleting energy assets when they can sell less energy for more money in future years?

Some of the decisions will be driven by the "real" discount rate that they expect. And in at least some cases, the discount rate is odd indeed. The telecom industry experienced the results of that in the late 1990s. Executive compensation in the form of limited-term options created a situation for the decision-makers that had a discount rate that went to infinity when the options expired. This led to an outcome that should have been expected: the executives did whatever it took to increase share prices in the near term so they could cash in before that infinite discount kicked in.

The situation in energy is different, of course, but the possibility of so-called hyper-discounting remains. Decisions are made by individuals, and the discount rate over time for those individuals may not match the simple uniform discount rate used in the Hotelling and other models.