The Unconventional Oil Supply Boom: Aggregate Price Response from Microdata

33 Pages Posted: 30 Oct 2017

See all articles by Richard G. Newell

Richard G. Newell

Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future

Brian Prest

Duke University

Date Written: October 2017

Abstract

We analyze the price responsiveness of onshore oil supply from conventional versus new unconventional "tight" formations in the United States. We separately analyze three key stages of oil production: drilling wells, completing wells, and production from completed wells. We find that the important margin is drilling investment. We estimate drilling responses of approximately 1.6 percent for tight oil and 1.2 percent for conventional oil per 1 percent change in oil prices. In addition, tight oil wells produce about 4.6 times more oil compared to conventional ones. Together, the long-run price responsiveness of supply is about 6 times larger for tight oil on a per well basis, and about 9 times larger when also accounting for the rise in unconventional-directed drilling. Based on our estimates derived from microdata, we conduct aggregate simulations of incremental oil supply at different time frames and price levels. The simulations show that the U.S. supply response is much larger now due to the shale revolution. Given a price rise to $80 per barrel, U.S. oil production could rise by 0.5 million barrels per day in 6 months, 1.2 million in 1 year, 2 million in 2 years, and 3 million in 5 years. Nonetheless, it takes many months before a substantial portion of the full supply response is online, longer than the 30 to 90 days typically associated with the role of "swing producer" such as Saudi Arabia.

Suggested Citation

Newell, Richard G. and Prest, Brian, The Unconventional Oil Supply Boom: Aggregate Price Response from Microdata (October 2017). NBER Working Paper No. w23973, Available at SSRN: https://ssrn.com/abstract=3061654

Richard G. Newell (Contact Author)

Duke University - Nicholas School of Environment ( email )

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Durham, NC 27708-0328
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National Bureau of Economic Research (NBER) ( email )

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Resources for the Future ( email )

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Brian Prest

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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