Decline Curve
Categories: Financial Theory, Derivatives
Think: the spines of old people and politicians.
The decline curve represents a way to predict future output from an oil or gas well. Think of a particular crude reserve as a pool of oil. Unlike a lake or a river, the oil pool isn’t fed by rain or a natural spring or any other source. New oil isn't coming in, so as it gets used up, it’s just gone (“you drank my milkshake!” etc.).
Over time, oil industry engineers have developed equations that can predict the rate of decline in production that happens as the oil gets used up. By knowing current production, as well as some other variables, analysts can predict what production will look like at points in the future.