Supply-side links in oil and gas markets

Ben Gilbert and Gavin Roberts ()
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Gavin Roberts: Department of Economics, Weber State University

No 2018-04, Working Papers from Colorado School of Mines, Division of Economics and Business

Abstract: Previous analyses of relationships between crude oil and natural gas markets focused primarily on demand-side connections. We provide a model and empirical evidence of important supply-side connections. First, crude oil and natural gas production require common inputs: drilling rigs, well completion services, and specialized labor. Competition for these inputs creates a cost-spillover channel through which a price shock for one commodity reduces supply of the other commodity. Second, crude oil wells produce associated gas, while natural gas wells often produce associated liquid hydrocarbons. This creates an associated-commodity channel through which a price shock for one commodity will increase supply of the other. Which effect dominates depends on the characteristics of the producing region. We test the model using well-level data from five large oil and gas producing basins in Texas and Oklahoma. We find substantial evidence across all five basins of a cost-spillover channel between natural gas prices and oil drilling, but mixed evidence of an associated-commodity channel between oil prices and natural gas drilling. Finally, we discuss the implications of these supply-side connections for energy policy.

Keywords: Energy; Petroleum; Crude Oil; Natural Gas (search for similar items in EconPapers)
JEL-codes: D72 F18 F59 Q56 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-07
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (1)

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http://econbus-papers.mines.edu/working-papers/wp201804.pdf First version, 2018 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mns:wpaper:wp201804

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