Supply Flexibility in the Shale Patch: Evidence from North Dakota

Abstract

We analyse if supply flexibility in oil production depends on the extraction technology. In particular, we ask to what extent shale oil producers respond to price incentives by changing completion of new wells as well as oil production from completed wells. Using a novel well-level monthly production data set covering more than 15,000 crude oil wells in North Dakota, we find large differences in response between conventional and unconventional (shale) extraction technology: While shale oil wells respond significantly to spot future spreads by changing both well completion and crude oil production, conventional wells do not. Our results suggest that firms using shale oil technology are more flexible in allocating output intertemporally. We interpret such output pattern of shale oil wells to be consistent with the Hotelling theory of optimal extraction.

Keywords: Oil extraction, crude oil prices, US oil shale boom, Hotelling theory

JEL Classification: C33, L71, Q31, Q40