On the Decision Relevance of Stochastic Oil Price Models: A Case Study

Hydrocarbon (oil, natural gas, liquids) are highly uncertain, so SDG uses a variety of probability price models to capture this risk.

In this paper, Dr. Hammond (Chevron) and Professor Eric Bickel analyze the importance of modeling hydrocarbon prices probabilistically. Importantly, they make a distinction between ranking decisions and valuation decisions – ranking decisions are ones in which projects are being compared to each other on a relative basis, and valuation decisions are ones in which an absolute value is placed on a project. In this paper [$], Hammond and Bickel show that while probabilistic price models are important for valuation decisions, they add relatively less value for ranking decisions.

Published in 2013 in The Engineering Economist. The abstract is free and the article is available for purchase at this link.


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