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Frack to the future: What enticed small firms to enter the natural gas market during the hydraulic fracturing boom?

Author

Listed:
  • Davis, Rebecca J.
  • Sims, Charles

Abstract

The shale gas boom of the early 2000s saw the highest and most volatile natural gas prices and production in history. Advances in horizontal drilling, 3-D seismic imaging, and hydraulic fracturing made it highly profitable for firms to produce large quantities of shale gas. This period was also characterized by a shift in market structure. The U.S. natural gas market was historically defined by large firms, but a large number of small firms began entering the market after 2000. While small firms made a negligible contribution to natural gas production during the shale gas boom, their entry may signal overcapitalization, productivity growth, and increased responsiveness of natural gas markets to exogenous shocks. We develop a real options model of market entry and exit and use data on natural gas drilling activity to test three potential explanations for small firm entry during the boom: 1. technological advances, 2. land lease speculation, and 3. regime change in natural gas prices. Our analysis provides mixed support for the first explanation but strong support for the last two.

Suggested Citation

  • Davis, Rebecca J. & Sims, Charles, 2019. "Frack to the future: What enticed small firms to enter the natural gas market during the hydraulic fracturing boom?," Energy Economics, Elsevier, vol. 81(C), pages 960-973.
    • Handle: RePEc:eee:eneeco:v:81:y:2019:i:c:p:960-973
    DOI: 10.1016/j.eneco.2019.05.025
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    Cited by:

    1. Julien Guyot & Akhil Rao & Sebastien Rouillon, 2022. "The long-run economics of sustainable orbit use," Working Papers hal-03896730, HAL.
    2. Miao, Xiaoyu & Wang, Qunwei & Dai, Xingyu, 2022. "Is oil-gas price decoupling happening in China? A multi-scale quantile-on-quantile approach," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 450-470.

    More about this item

    Keywords

    Natural gas; Market structure; Regime switching; Uncertainty; Irreversibility;
    All these keywords.

    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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