Valuation of oil and gas producing properties requires projections of production rates, product prices, taxes to be paid and operating expenses. Production forecasts are based on engineering analysis with considerations given to equipment capacity, well deliverability and demand. Current laws normally govern tax considerations, although legislation under consideration must also be recognized. Past expenses coupled with estimates relative to inflation provide the basis for estimates of future expenses. Price forecasts have been dependent upon current prices with estimates as to future inflation rates. Therefore, the appraiser of an oil and gas property must have not only a geotechnical background but also an understanding of economics and finance.
Until the early 1970's, the oil industry had primarily focused economic analysis on domestic supply and demand. As this demand exceeded the supply, resulting in increased levels of imports, attention turned to supplies outside the United States. Today our evaluations require analysis of worldwide economic factors when projecting production rates, prices and expenses. Estimates of crude oil supply relative to the price for the various producing nations have been made, thereby providing supply schedules with the attendant supply curves. Estimates of world demand were made to obtain demand schedules and demand curves. The supply and demand curves have been brought together to provide the estimated equilibrium price for oil.