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

45 Pages Posted: 17 Oct 2016 Last revised: 16 Jun 2018

See all articles by Gavin Roberts

Gavin Roberts

University of Wyoming, College of Business, Department of Economics and Finance

Ben Gilbert

Colorado School of Mines - Division of Economics and Business

Date Written: June 4, 2018

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

JEL Classification: D72, F18, F59, Q56

Suggested Citation

Roberts, Gavin and Gilbert, Ben, Drill-Bit Parity: Supply-Side Links in Oil and Gas Markets (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=2853118 or http://dx.doi.org/10.2139/ssrn.2853118

Gavin Roberts (Contact Author)

University of Wyoming, College of Business, Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY
United States

Ben Gilbert

Colorado School of Mines - Division of Economics and Business ( email )

1500 Illinois Street
Golden, CO 80401
United States

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