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Tuesday, January 6, 2015

Brownian Movement

Annual Alaska North Slope West Coast (ANSWC) crude oil prices were generated from an Omstein- Uhlenbech type Mean-Reversion price model with parameters estimated as described by Schwartz, using annual price data for ANSWC crude as reported by Platt's. The model reverts to DNR's expected mean value of $53 per barrel, over time. In mathematics, the Ornstein–Uhlenbeck process (named after Leonard Ornstein and George Eugene Uhlenbeck), is a stochastic process that, roughly speaking, describes the velocity of a massive Brownian particle under the influence of friction. The process is stationary, Gaussian, and Markovian, and is the only nontrivial process that satisfies these three conditions, up to allowing linear transformations of the space and time variables. Over time, the process tends to drift towards its long-term mean: such a process is called mean-reverting. The process can be considered to be a modification of the random walk in continuous time, or Wiener process, in which the properties of the process have been changed so that there is a tendency of the walk to move back towards a central location, with a greater attraction when the process is further away from the centre.”

What in hell does it mean, and is this the tool used to figure out the price of Alaska's oil wealth? Well it appears that our Department of Natural Resources had done its homework, too bad the legislature couldn't read – as if we would have settled our indifferences at $53 a barrel for purposes of ethical budgeting – we would be enjoying a safe-haven today and also found a “Rainy Day Fund” at our disposal, instead of the Juneau brats having fun with, well a “Massive Brownian particle under the influence of friction”, sounds like a “hemorrhoid” affair!

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