On the theory of crude oil prices—II. Price elasticity of crude oil reserves

Abstract

If recent trends are continued, the price of crude oil will be a strong driving force in changing the practice of energy conversion. This paper discusses the price elasticity of crude oil reserves. Following a presentation of an overview of historical crude oil prices at the well-head and proved reserves, correlations are examined between average well-head price and proved reserves by examining the impacts of price on the three basic industry operations: extraction, development and exploration. Within a given range, bound by natural and geological constraints, the inventory of proved reserves is price elastic. A market-induced increase in price, unrelated to rising costs, provides further incentives for the exploration of oil, finances improved engineering research and practices, permits greater average well depth, increases total number of producing wells drilled, and enhances quantities of commercially accessible oil in the wells. Thus, upward movement of price can serve to augment, and in a special sense, to generate recoverable oil.