Competitive Scarcity with Exploration

Abstract

In the previous models we assumed the extractive process to be the only force changing the reserve size. In reality, other forces play a role, too, in determining the size of the reserve. Among those are exploration and discovery. The rate of exploration E (e.g., the rate of feet drilled per year in search of oil) controls the discovery rate (D), which, in turn, directly affects discovery cost (DC). Assume that this relation between exploration and discovery rate is given by

$$ D = 200.4*{{E}^{{BETA}}} $$

((1))

and that the relation between discovery cost and the rate of exploration is

$$ DC = 3*{{E}^{{ALPHA}}} $$

((2))

The change of the exploration cost per unit of the resource found is called the marginal discovery cost (MDC).

The generally accepted view is that markets are always right—that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite point of view. I believe that market prices are always wrong in the sense that they present a biased view of the future.

George Soros, 1987