Authors libby rittenberg 725

prices will not persist after world growth returns to normal. This idea is
certainly one to consider as we watch the path of oil prices over the next
few years.
Sources: Peter Maass, “The Breaking Point,” The New York Times Magazine
Online, August 21, 2005; Jad Mouawad, “The Big Thirst,” The New York
Times Online, April 20, 2008; US. Energy Information Administration,
International Controlling a Monthly, May 2008, Table 4.1c; Neil King, Jr.
“Saudis Face Hurdles in New Oil Drilling,” The Wall Street Journal, April 22,
2008, A1, Neil King, Jr. “Global Oil-Supply Worries Fuel Debate in Saudi
Arabia,” The Wall Street Journal, June 27, 2008, A1.

ANSWER TO TRY IT! PROBLEM
Since you expect oil prices to rise ($54 − 45)/$45 = 20% and the
interest rate is only 10%, you would be better off waiting a year
before emptying the well. Another way of seeing this is to compute
the present value of the oil a year from now:
Po = ($54 * 10,000)/(1 + 0.10)1 = $490,909.09
Since $490,909 is greater than the $45*10,000 = $450,000 you could
earn by emptying the well now, the present value calculation shows
the rewards of waiting a year.
If the choice is to empty the well now or in 2 years, however, you
would be better off emptying it now, since the present value is only
$446,280.99:
Po = ($54 * 10,000)/(1 + 0.10)2 = $446,280.99

Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

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