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The Relationship Between Oil Price and Costs in the Oil Industry

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  • Gerhard Toews and Alexander Naumov

Abstract

We propose a simple structural model of the upstream sector in the oil industry to study the determinants of costs with a focus on its relationship with the price of oil. We use the real oil price, data on global drilling activity and real cost of drilling to estimate a three-dimensional VAR model. We use short run restrictions to decompose the variation in the data into three structural shocks. We estimate the dynamic effects of these shocks on drilling activity, costs of drilling and the real price of oil. Our main results suggest that (i) a 10% increase (decrease) in the oil price increases (decreases) global drilling activity by 4% and costs of drilling by 3% with a lag of 4 and 6 quarters respectively; (ii) positive shocks to drilling activity affect the oil price negatively within a year; (iii) shocks to cost of drilling have a relatively small and statistically insignificant effect on the price of oil.

Suggested Citation

  • Gerhard Toews and Alexander Naumov, 2015. "The Relationship Between Oil Price and Costs in the Oil Industry," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    • Handle: RePEc:aen:journl:ej36-si1-toews
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    References listed on IDEAS

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    1. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
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