Basic Conditions for Petroleum Economics

  • Alberto Clô


In order to understand the market dynamics, company strategies, policies and price trends of petroleum economics, a number of important “basic conditions” need to be considered. Each of these has a different influence according to the aspect that we intend to investigate, and each changes with time according to technological developments and market situations. Only a thorough analysis will help us to isolate the effect of each individual condition as well as, more importantly for analytical purposes, their combined effect. Table 1.1. shows the basic conditions that are the most relevant in petroleum economics as regards supply and demand.


Middle East Petroleum Industry Supply Curve Replacement Cost Proven Reserve 
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  1. 1.
    A new find of a significant dimension does not today cost less than 500–1,000 million dollars.Google Scholar
  2. 2.
    In the period 1983–87 the average rates of success in drilling activities exceeded 40% in OPEC countries; 35%-40% in some non-OPEC countries where investments have been directed only recently (including: Norway, Oman, Angola, Columbia, Thailand) and 25%-35% in other non-OPEC countries (Great Britain, Holland, Brazil, Egypt, Malaysia, India, Australia). In evaluating the significance of this data — sometimes (apparently) more comforting than those of the past — we must bear in mind that they exclude extensive areas where the results have been clearly negative (such as North America) and especially the fact that they refer to absolute levels of investment which fell sharply in the period examined, due to the slump in crude oil prices, with a number of explored wells 30%-40% lower in Africa and Latin America; 11% in Europe, 3%-4% in the Middle and Far East. Forced to reduce their spending plans, because of fewer available funds and the lower profitability expected from the investments, the firms have concentrated on relatively low-risk projects and lower costs, thus sometimes leading to an improvement in the average success rate.Google Scholar
  3. 3.
    If for example a country wishes to maintain a level of reserves equal to 15 years of production, with a rate in the growth of production of 3% per year, extracting a ton of crude oil in the year N, in the subsequent year it needs to discover N + 1: 1.03 + (I5 x 1.03 — 15) = 1.48 tons of petroleum (Masseron, 1982, p. 17).Google Scholar
  4. 4.
    Just one of those refineries was equal to the sum of the three largest that followed it on the scale.Google Scholar
  5. 5.
    In the Eighties in Europe alone about 50 plants closed down, with a cut in capacity of about 40%.Google Scholar
  6. 6.
    According to Masseron, in 1981 a ship of 50 thousand DWT had a construction cost of 500–550 dollars/DWT compared with the 400 of a ship of 100 thousand DWT and 300–320 doll. of a ship of 200 thousand DWT. With an expected lifetime of 15 years and given the usual conditions of financing, the annual cost of the amortisation cost for a new ship of 250–300 thousand DWT was 45%-55% lower than for one of 50 thousand DWT.Google Scholar
  7. 7.
    The increase of around 80% in the (real) prices of energy between 1973 and 1976 in Japan and in Italy led to reductions in consumption, over the same span of time, of 0.3% and 3.4%, thus with an elasticity of just -0.004 and -0.04. There was much more reaction from consumption in Canada and in the United States mainly due to their different distribution according to sectors of use (much more concentrated in the sector of transports and in domestic use).Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • Alberto Clô
    • 1
  1. 1.Bologna UniversityItaly

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