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Real Options in Oil Market Crisis: Analyzing Market Values of Two Companies

Explore the impact of oil price fluctuations on market values of Royal Dutch and Petrobras during a crisis in the Middle East. Understand how market values change with oil price jumps and subsequent drops. Enhance your understanding of real options in the oil industry.

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Real Options in Oil Market Crisis: Analyzing Market Values of Two Companies

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  1. Real Options 2

  2. Background..

  3. Oil prices moving… Now assume that a crisis in the Middle East causes oil prices to jump from $80/barrel to $160/barrel tomorrow. What will happen to the market values of the two companies? • They will both go up by the same amount • Royal Dutch will go up more than Petrobras • Petrobras will go up more than Royal Dutch

  4. And back again.. Assume that the crisis passes the day after tomorrow and that oil prices drop back to $ 80/barrel. What do you foresee happening to the market values of the two companies? • They will both revert back to the current market cap • They will both be worth more than the current market cap, but Royal Dutch will be worth more. • They will both be worth more than the current market cap, but Petrobras will be worth more.

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