OIL INDUSTRY INVESTMENT AND RESEARCH AS PORTFOLIO CHOICES (AUCTIONS, BIDS)

This dissertation analyses the risk and return trade-offs among investments in capital projects and in research and development (R&D) for the oil industry. The Tobin-Markowitz portfolio selection model is used to test two hypotheses: (1) the oil price increase of 1973-74 altered the structure of oil industry risks and returns in favor of certain types of research and investment; (2) the altered structure of risks and their correlations affected the allocation of funds to capital investment and research and development in the oil industry. To test these hypotheses, the efficient frontiers of investment and R&D projects for a representative firm in the oil industry are derived empirically, pre-embargo and post-embargo. By assumption, the composition of a representative firm's portfolio is also that of the industry. These frontiers are then compared with actual investment and R&D expenditures by the oil industry.;Both the actual expenditure shares by the industry and those predicted by the model showed an increased share of the portfolio devoted to offshore oil investment and a decreased share to other projects after the embargo. The industry also paid more for tracts pre-embargo than the model indicates, and paid less post-embargo. The predicted results also suggest that expenditure on R&D in enhanced oil recovery and synthetic fuels was less desirable than other investment options in both periods.;In deriving the efficient frontiers, the Tobin-Markowitz model is altered to account for an "asset" whose supply to the industry is fixed and whose price is determined endogenously from the portfolio selection model itself. This asset is an offshore oil tract. The government fixes the supply of offshore oil tracts to the industry, for which the firms submit sealed bids. Because the returns to investment in offshore oil covary with the returns to other types of industry investment and R&D, firms determine the price to bid for a tract in conjunction with the allocation of funds to all of the firm's projects.