Finding and developing costs in the USA 1945-1985

Abstract

Development cost is defined as the ratio of development expenditures in a given year to reserves added in that year. Changes in development cost are a good proxy for changes in finding cost and in user cost, because discovery, development, and postponement or holding of hydrocarbons in place, are three competing forms of investment. Popular definitions of "finding" cost are an illogical and useless mixture of discovery and development. Although the discovery of large oil fields peaked before 1930, oil reserves added by development increased then stabilized around 1960. Costs tended if anything to decrease through 1972, but the decrease was mostly a one-time gain through the retreat from a costly regulatory scheme. The first price explosion in 1974 saw a strong decline in oil reserves added. The second price explosion was followed by an increase, but the best performance since 1949-51 came in 1983- 85, when oil prices were declining by nearly one fourth in real terms. High oil and gas prices promoted a drilling boom, which raised factor prices and lowered efficiency. Old-field development was therefore inhibited, but then helped as the boom deflated. Therefore the effect of the steeper price decline of 1986-87 has been mitigated by the decline in cost.