Drill-Bit Parity: Supply-Side Links in Oil and Gas Markets

Ben Gilbert and Gavin Roberts

Journal of the Association of Environmental and Resource Economists, 2020, vol. 7, issue 4, 619 - 658

Abstract: We provide a model and empirical evidence of supply-side connections between oil and gas markets. Oil and gas production require common inputs: drilling rigs and specialized labor. Competition for inputs creates a cost-spillover channel through which a price shock for one commodity reduces drilling for, and production of, the other commodity. Oil wells produce associated gas, while gas wells produce associated liquid hydrocarbons. This creates an associated-commodity channel through which a price shock for one commodity might increase or decrease drilling for the other commodity, and always increases production of, the other commodity. Which effect dominates depends on basin characteristics. We test the model using well-level data from five oil- and gas-producing basins in Texas and Oklahoma, and using data from all onshore basins in the contiguous United States. We find evidence of an associated-commodity channel linking oil and gas markets and discuss the policy implications of these supply-side connections.

Date: 2020
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Citations: View citations in EconPapers (6)

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