The portfolio choice model presented here incorporates the impact of internal firm covariance risk on lease prices for offshore oil tracts. Based on estimates of ex ante investment risks and returns, the model predicts tract values before and after the 1973-74 oil embargo, which are then compared with actual expenditures by the industry. The results suggest that a decrease in actual lease prices subsequent to the embargo partly may have reflected overbidding in the early 1970s rather than underbidding later in the decade.