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Oil exploration and perceptions of scarcity: The fallacy of early success
Uppsala University, Disciplinary Domain of Science and Technology, Physics, Department of Physics and Astronomy, Global Energy Systems.
Uppsala University, Disciplinary Domain of Science and Technology, Physics, Department of Physics and Astronomy, Global Energy Systems.
University of Liverpool Management School.
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
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2012 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 34, no 4, 1226-1233 p.Article in journal (Refereed) Published
Abstract [en]

It has been suggested that oil exploration may lead to false perceptions of decreasing scarcity. We perform a simulation of the exploration process using Bayesian updating. The approach enables us to isolate the information effect on the success rate and also to quantify the subjective expectation of the total resource size. The area under exploration consists of a number of regions which may differ in their oil content. Exploration is performed with the goal to maximize the expected success rate. The resulting information about the distribution of oil and the total resource size is assumed public knowledge. A number of scenarios with variations in the dimensions of the area under exploration, the oil distribution and initial beliefs are considered. The results indicate that the information effect on the success rate is significant but brief — it might have a considerable impact on price but is an unlikely mechanism behind a long-term declining price trend. However, the information effect on expectations is gradual and persistent. Since exploration is performed in regions where the expected success rate is the highest, the historical success rate will not be representative of the area as a whole. An explorer will tend to overestimate the total resource size, thereby suggesting an alternative mechanism for false perceptions of decreasing scarcity, a mechanism that could be called the “fallacy of early success”.

Place, publisher, year, edition, pages
2012. Vol. 34, no 4, 1226-1233 p.
Keyword [en]
Oil exploration, Success rate, Expectation bias, Bayesian updating, U-shaped price path
National Category
Economics Geosciences, Multidisciplinary Energy Systems
URN: urn:nbn:se:uu:diva-163174DOI: 10.1016/j.eneco.2011.11.003ISI: 000306158000038OAI: oai:DiVA.org:uu-163174DiVA: diva2:463035
Available from: 2011-12-08 Created: 2011-12-08 Last updated: 2015-08-11Bibliographically approved
In thesis
1. Petroleum Production and Exploration: Approaching the End of Cheap Oil with Bottom-Up Modeling
Open this publication in new window or tab >>Petroleum Production and Exploration: Approaching the End of Cheap Oil with Bottom-Up Modeling
2012 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The theme of this thesis is the depletion of petroleum (crude oil and natural gas). Are there reasons to be concerned about an ‘end of cheap oil’ in the near future? There is a lively debate regarding this issue. The debate is sometimes described as a clash of ‘concerned’ natural scientists and ‘unconcerned’ economists. However, this clash is both harmful and unnecessary. The views of natural scientists and economists can and should be reconciled. At the micro-level, geological and physical factors (such as diminishing reservoir productivity) are parameters in the producer’s economic optimization problem. Bottom-up modeling therefore appears to hold more promise for forming a common understanding of depletion than prevailing top-down models, such as the controversial Hubbert model.

The appended papers treat various aspects of petroleum depletion: critical examination of top-down scenarios (I); bottom-up economic and geologic modeling of regional production (II); review of published bottom-up models and sensitivity analysis (III); simulation of success rates and expectations in oil exploration (IV); bottom-up scenarios of future natural gas production in Norway (V) and Russia (VI); empirical analysis of production profiles of giant oil fields (VII).

Bottom-up models have the potential to be accepted by scientists from different disciplines, and they enable interpretable sensitivity analyses. They are, however, not likely to reduce quantitative uncertainty in long-term scenarios. There is theoretical evidence of the possibility that petroleum scarcity occurs long before the recoverable resource is close to exhaustion. This result is a consequence of both geological and economical factors. Several arguments for an ‘unconcerned’ view are at best uncertain, and at worst relying on questionable assumptions (analyzing reserves rather than production flows, using irrelevant reserve definitions, using average cost instead of marginal cost). The considerable uncertainty regarding an issue of such importance is in itself a cause for concern.

Place, publisher, year, edition, pages
Uppsala: Acta Universitatis Upsaliensis, 2012. 85 p.
Digital Comprehensive Summaries of Uppsala Dissertations from the Faculty of Science and Technology, ISSN 1651-6214 ; 891
National Category
Other Engineering and Technologies not elsewhere specified
urn:nbn:se:uu:diva-163181 (URN)978-91-554-8252-7 (ISBN)
Public defence
2012-02-24, Häggsalen, Ångströmlaboratoriet, Lägerhyddsvägen 1, Uppsala, 09:15 (English)
Available from: 2012-02-03 Created: 2011-12-08 Last updated: 2012-02-15Bibliographically approved

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