The Economics of Old Field Oil Supply

Abstract

Most additions to proved reserves of crude oil in the United States are associated with reserve revisions and reservoir extensions, which derive exclusively from the continuing development of known oil fields. This paper reviews the major activities pursued by oil field operators that determine the level of production from those fields. Reported reserve additions reflect the consequencies of these activities for the productive capability of old fields and, thus, should be expected to be related to the costs and benefits of investing in such activities. A simple econometric, analysis is presented that demonstrates the influence of oil prices, lifting costs, taxes, and crude oil price controls on reported reserve revisions and extensions for the United States for the period 1970–1986. The strength of the relationship evaluated is particularly striking in light of the year-to-year variability of revisions data noted in other studies. Based on the economic perspective of reserve additions outlined here, U.S. reserves data for 1986 are used to provide a look at the activities that may thus be presumed to have led to the production losses recorded in that watershed year.