We investigate the economics of exploration and development of oil and gas fields in the United States over the period 1955-2002. We make four contributions to explaining the economic evolution of the oil and gas industry during this period. First, we derive a testable model of the dynamics of oil and gas field exploration and development in a competitive environment. Second, we show how to empirically distinguish Hotelling scarcity effects from effects due to technological change. Third, we test these hypotheses using a newly created panel of exploration and development data. We find that the time paths of exploration, development and total wells drilled are dominated by Hotelling scarcity effects. This suggests that the rent-dissipation in oil and gas field exploration and development has been far less than previously believed. Our final contribution is to offer an explanation of why fixed costs from exploration can make the contracting equilibrium in the mineral rights market efficient.
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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number
2007-15.
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