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  • Graham A. Davis,

    1. Assistant Professor, Colorado School of Mines, Golden, Colo., Phone 1–303 273-3550 Fax 1–303 273-341 6, E-mail
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  • Robert D. Cairns

    1. Professor, McGill University, Montreal, Quebec Phone 1–514 398-3660, Fax 1–514 398-4938 E-mail
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    • *We thank Morris Adelman, John Hartwick, seminar participants at the Canadian Resource and Environmental Economics Study Group Conference, Vancouver, Canada, September 1995, in particular Ken Hendricks, participants at the Front Range Finance Conference, Boulder, Colorado, November 1995, seminar participants at the University of Colorado, Co-Editor Scott Masten, and two anonymous referees for comments that have led to improvements in the paper. David Moore provided exceptional research assistance. This research is funded by the NSF/EPA Partnership for Environmental Research, Grant No. R824705-01-0 and by an FCAR team grant.


Miller and Upton propose the “Hotelling Valuation Principle”: producing mineral reserves can be valued by multiplying the mineral's current net price by the reserve estimate. Adelman argues that, by omitting production constraints, the Hotelling value provides an upper bound on oil reserve value. Others claim oil reserves are options on oil, with the Hotelling value being a lower bound on their value. In an optimizing model of oil production we incorporate uncertainty and production constraints and find that the Hotelling value is a theoretical upper bound on value. We also find that a modified net price rule approximates reserve value. (JEL Q41, G13, G12)