Is Hotellingʹs Rule Relevant to Domestic Oil Production?

A model of oil supply from known reserves is developed to incorporate geological and engineering principles in the oil field operatorʹs decision problem. Oil production from existing wells within an oil field is isolated from the drilling of new wells. The geo-engineering rule known asmaximum efficient recovery(MER) is nested within the economic model to test the hypothesis that production from established fields is invariant to the price of oil. The econometric model is applied to quarterly data from seven Montana oil fields. The MER model is strongly rejected by the data, providing evidence that oil supply models should include economic as well as geo-engineering principles