Oil exploration and perceptions of scarcity: The fallacy of early success

It has been suggested that oil exploration may lead to false perceptions of decreasing scarcity. We perform a simulation of the exploration process using Bayesian updating. The approach enables us to isolate the information effect on the success rate and also to quantify the subjective expectation of the total resource size. The area under exploration consists of a number of regions which may differ in their oil content. Exploration is performed with the goal to maximize the expected success rate. The resulting information about the distribution of oil and the total resource size is assumed public knowledge. A number of scenarios with variations in the dimensions of the area under exploration, the oil distribution and initial beliefs are considered. The results indicate that the information effect on the success rate is significant but brief it might have a considerable impact on price but is an unlikely mechanism behind a long-term declining price trend. However, the information effect on expectations is gradual and persistent. Since exploration is performed in regions where the expected success rate is the highest, the historical success rate will not be representative of the area as a whole. An explorer will tend to overestimate the total resource size, thereby suggesting an alternative mechanism for false perceptions of decreasing scarcity, a mechanism that could be called the "fallacy of early success". (C) 2011 Elsevier B.V. All rights reserved.