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

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  • Ben Gilbert
  • Gavin Roberts

Abstract

We provide a model and empirical evidence of supply-side connections between oil and gas markets. Oil and gas production require common inputs: drilling rigs and specialized labor. Competition for inputs creates a cost-spillover channel through which a price shock for one commodity reduces drilling for, and production of, the other commodity. Oil wells produce associated gas, while gas wells produce associated liquid hydrocarbons. This creates an associated-commodity channel through which a price shock for one commodity might increase or decrease drilling for the other commodity, and always increases production of, the other commodity. Which effect dominates depends on basin characteristics. We test the model using well-level data from five oil- and gas-producing basins in Texas and Oklahoma, and using data from all onshore basins in the contiguous United States. We find evidence of an associated-commodity channel linking oil and gas markets and discuss the policy implications of these supply-side connections.

Suggested Citation

  • Ben Gilbert & Gavin Roberts, 2020. "Drill-Bit Parity: Supply-Side Links in Oil and Gas Markets," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(4), pages 619-658.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/708160
    DOI: 10.1086/708160
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    Cited by:

    1. Prest, Brian C. & Fell, Harrison & Gordon, Deborah & Conway, TJ, 2023. "Estimating the Emissions Reductions from Supply-side Fossil Fuel Interventions," RFF Working Paper Series 23-11, Resources for the Future.
    2. Apergis, Nicholas & Ewing, Bradley T. & Payne, James E., 2021. "The asymmetric relationship of oil prices and production on drilling rig trajectory," Resources Policy, Elsevier, vol. 71(C).
    3. Prest, Brian C., 2020. "Supply-Side Reforms to Oil and Gas Production on Federal Lands: Modeling the Implications for Climate Emissions, Revenues, and Production Shifts," RFF Working Paper Series 20-16, Resources for the Future.
    4. Kheiravar, Khaled H, 2019. "Economic and Econometric Analyses of the World Petroleum Industry, Energy Subsidies, and Air Pollution," Institute of Transportation Studies, Working Paper Series qt3gj151w9, Institute of Transportation Studies, UC Davis.

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