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Trophy Hunting versus Manufacturing Energy: The Price Responsiveness of Shale Gas

Richard Newell (), Brian Prest and Ashley B. Vissing

Journal of the Association of Environmental and Resource Economists, 2019, vol. 6, issue 2, 391 - 431

Abstract: We analyze the relative price responsiveness of unconventional versus conventional natural gas extraction. We separately analyze three key stages of gas production: drilling wells, completing wells, and producing natural gas from the completed wells. The most important margin is drilling investment, and neither production from existing wells nor completion times respond strongly to prices. We estimate a gas drilling response of 0.9% per 1% gas price shock, for both conventional and unconventional sources. Nonetheless, because unconventional wells produce about three times more gas per well than conventional ones, the supply response is much larger for unconventional supply. Accounting for changes to the level and composition of drilling activity, the gas supply is about three times more responsive during the "shale era" of 2010-15 compared to 2000-2005. We illustrate how the distinctions between the stages of production (drilling, completion, and production) are key to understanding price responsiveness.

Date: 2019
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