A drilling co knows it cost 25,000 to sink a test well. If oil is hit the companies income will be 335,000. If only gas is hit135,000 and nothing if no hits. If the probability of hitng oil is 1/40 and 1/20 for gas what is the expectation for the co
The probability of hitting oil or gas is 1/40 * 1/20 = 1/800 or 0.00125 or 0.125%. There is a higher probability of hitting nothing than hitting oil or gas. so what the company should do is abandon the current location and try another location that has higher odds of hitting oil or gas. Companies hire geologists to take core samples of the earth to find what minerals are below the surface. Geologists then report back to the company on what they find in the samples and what the company can expect to find if they dig a test well.