We study optimal oil extraction strategy and the value of an oil field using a multiple real option approach. Extracting a barrel of oil is similar to exercising a call option and optimal strategies lead to deferring production when oil prices are low and when volatility is high. We show that, in theory, the net present value of a country's oil reserves is increased significantly (by 100 percent, in the most extreme case) if production decisions are made conditional on oil prices. We also show that the marginal value of additional capacity is higher for countries with bigger resources and longer production horizons. We apply the model to Brazil and the U.A.E. in order to pin down two points of the global supply curve.
real options
,capacity expansion
,stochastic optimization
,oil production
