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The Impact of Oil Price on Additions to U.S. Proven Reserves

Departing from Hotelling's assumption of fixed and known reserves, this paper develops an economic model of additions to proven reserves that explicitly incorporates the effects of expected resource price, cumulative reserves development, and technological progress on reserve additions. The model treats additions to proven oil reserves as output of a production process in which drilling wells is a primary input to transform some of oil-in-place into the economic category of proven reserves. Application of the model to U.S. data for the1950-1995 period provides strong statistical support for the existence of all the three salient effects. We obtain an estimate of the price elasticity of reserve additions (absent from previous studies) which, although statistically highly significant, is rather small. Using this price elasticity estimate, it is shown that if in the face of steady economic growth, and hence oil consumption, U.S. oil import dependence is to be kept from rising in the future, ceteris paribus, a steady oil price increase in the range of 1.5 to 4.5 percent a year is essential. Key Words: reserves additions, price effect, depletion, technological progress, oil dependence