Debt, Investment and Production in the U.S. Oil Industry: An Analysis of the 2014 Oil Price Shock
45 Pages Posted: 3 Aug 2016 Last revised: 16 Aug 2016
Date Written: August 1, 2016
The spot price of crude oil declined from $106.07 per barrel on June 30, 2014 to $53.45 per barrel on December 31, 2014, representing a 50% decline within six months. By December 31, 2015, the spot price had declined further, to $37.13, and it remains substantially below its level during 2011 through the first half of 2014. We use this shock to oil prices to examine the relation between leverage and changes in investment and production when firms face a sudden change in their investment opportunity sets. Using a sample of 341 U.S. oil producers during 2011-2015, we find that highly leveraged oil producers (i) cut capital expenditures and (ii) increase production by significantly more than less leveraged oil producers. The results suggest that highly leveraged oil producers reduce investment and increase production to generate cash flow to make their debt payments after the oil price shock. Insofar that the capital structure of oil producers affects the level of production, it suggests that leverage can affect the dynamics of oil prices.
Keywords: 2014 oil price shock, debt, investment, production
JEL Classification: D24, G31, G32
Suggested Citation: Suggested Citation