In this paper, I develop a model where “exploration” yields information about the size and location of the stock of an exhaustible resource. This information is valuable in two ways. First, before production takes place, reserves must be located through exploration. The process of exploration changes “unproven reserves,” which cannot be produced, into “proven reserves,” which can. One value of exploration, then, is that it allows total production over time to expand (the expansion effect). Second, by exploring in an early time period, a producer gains information about the true stock size prior to making a decision about how fast to exploit reserves. With better information, the extraction rate chosen by the producer will yield higher [...]
