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Geometric Gradient Problem: The Saudis produce 3.65 Billion barrels of oil a year. Let’s ignore climate...
Geometric Gradient Problem:
The Saudis produce 3.65 Billion barrels of oil a year. Let’s ignore climate change and drone stuff and say that production will increase at 2% per year due to demand from Asia. Also, the current price of $65/barrel is expected to increase by 4 percent a year for 20 years. What is the present worth of the anticipated 20 years revenue stream assuming the interest rate is 8%.
Solutions
Expert Solution
Present value =
| $3,951.48 billion |
WORKINGS
| Year | Production (billion) | Price per barrel | Revenue($ billion) |
| 1 | 3.723 | 67.6 | 251.6748 |
| 2 | 3.79746 | 70.304 | 266.9766278 |
| 3 | 3.8734092 | 73.11616 | 283.2088068 |
| 4 | 3.950877384 | 76.0408064 | 300.4279023 |
| 5 | 4.029894932 | 79.08243866 | 318.6939187 |
| 6 | 4.11049283 | 82.2457362 | 338.070509 |
| 7 | 4.192702687 | 85.53556565 | 358.6251959 |
| 8 | 4.276556741 | 88.95698828 | 380.4296078 |
| 9 | 4.362087875 | 92.51526781 | 403.559728 |
| 10 | 4.449329633 | 96.21587852 | 428.0961595 |
| 11 | 4.538316226 | 100.0645137 | 454.124406 |
| 12 | 4.62908255 | 104.0670942 | 481.7351698 |
| 13 | 4.721664201 | 108.229778 | 511.0246682 |
| 14 | 4.816097485 | 112.5589691 | 542.094968 |
| 15 | 4.912419435 | 117.0613279 | 575.054342 |
| 16 | 5.010667824 | 121.743781 | 610.017646 |
| 17 | 5.11088118 | 126.6135322 | 647.1067189 |
| 18 | 5.213098804 | 131.6780735 | 686.4508074 |
| 19 | 5.31736078 | 136.9451964 | 728.1870165 |
| 20 | 5.423707995 | 142.4230043 | 772.4607871 |
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