Back in the 1950s the players in the American petroleum industry turned their eyes to the Gulf of Mexico. With newer technology it was possible to drill offshore. So the race began and the oil companies bid for drilling rights and set up operations. There was only one problem. These offshore oil wells weren't turning a profit. Is drilling on the seabed harder than drilling on dry land? Sure, but that wasn't the difficulty. The real problem was the bidding process given the uncertainties in information available to the oil companies. This was explained in an article published in the Journal of Petroleum Technology titled "Competitive bidding in high risk situations," by Capen, Clapp and Campbell of the Atlantic Richfield Company (ARCO) in 1971. Here they coined the term "winner's curse."
Be Sure to Continue to Page 2 of "The Winner's Curse - Oil Field Economics and Baseball".