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Supply Response in a Regulated Industry: The Case of Natural Gas

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  • Edward W. Erickson
  • Robert M. Spann

Abstract

This article contains the application of an econometric model to estimate the price responsiveness of nee discoveries of natural gas. The model is fit for the period prior to the beginning of area rate regulation of the wellhead price of natural gas. The theory of joint costs and the effects of dissimilar inventories of undrilled gas and oil prospects are used to explain the pattern of signs and magnitudes of the coefficients derived. These coefficients are then used to simulate discoveries for the regulatory period and the simulation is compared to the record of actual discoveries. The simulated discoveries are uniformly higher than the actual observed discoveries. A possible explanation of this result is the effect of regulation and changes in regulatory policies upon the elasticity of expectations for gas prices, and a rigorous statement of the relation is developed. We close with a general discussion of the magnitude of price increase necessary to clear the market for new gas discoveries.

Suggested Citation

  • Edward W. Erickson & Robert M. Spann, 1971. "Supply Response in a Regulated Industry: The Case of Natural Gas," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 94-121, Spring.
    • Handle: RePEc:rje:bellje:v:2:y:1971:i:spring:p:94-121
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    Cited by:

    1. Mohn, Klaus & Osmundsen, Petter, 2008. "Exploration economics in a regulated petroleum province: The case of the Norwegian Continental Shelf," Energy Economics, Elsevier, vol. 30(2), pages 303-320, March.
    2. Güntner, Jochen H.F., 2019. "How do oil producers respond to giant oil field discoveries?," Energy Economics, Elsevier, vol. 80(C), pages 59-74.
    3. Iledare, Omowumi O., 1995. "Simulating the effect of economic and policy incentives on natural gas drilling and gross reserve additions," Resource and Energy Economics, Elsevier, vol. 17(3), pages 261-279, November.
    4. Chen, Fan & Linn, Scott C., 2017. "Investment and operating choice: Oil and natural gas futures prices and drilling activity," Energy Economics, Elsevier, vol. 66(C), pages 54-68.
    5. Machiel Mulder & Arie ten Cate & Ali Aouragh & Joeri Gorter, 2004. "Gas exploration and production at the Dutch continental shelf: an assessment of the 'Depreciation at Will'," CPB Document 66, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Mr. Noureddine Krichene, 2006. "World Crude Oil Markets: Monetary Policy and the Recent Oil Shock," IMF Working Papers 2006/062, International Monetary Fund.
    7. Machiel Mulder & Arie ten Cate & Ali Aouragh & Joeri Gorter, 2004. "Gas exploration and production at the Dutch continental shelf: an assessment of the 'Depreciation at Will'," CPB Document 66.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Askari, Hossein & Krichene, Noureddine, 2010. "An oil demand and supply model incorporating monetary policy," Energy, Elsevier, vol. 35(5), pages 2013-2021.
    9. Brandt, Adam R., 2010. "Review of mathematical models of future oil supply: Historical overview and synthesizing critique," Energy, Elsevier, vol. 35(9), pages 3958-3974.
    10. ten Cate, Arie & Mulder, Machiel, 2007. "Impact of the oil price and fiscal facilities on offshore mining at the Dutch Continental Shelf," Energy Policy, Elsevier, vol. 35(11), pages 5601-5613, November.
    11. Micaela Ponce & Anne Neumann, 2014. "Elasticities of Supply for the US Natural Gas Market," Discussion Papers of DIW Berlin 1372, DIW Berlin, German Institute for Economic Research.
    12. Managi, Shunsuke & Opaluch, James J. & Jin, Di & Grigalunas, Thomas A., 2005. "Technological change and petroleum exploration in the Gulf of Mexico," Energy Policy, Elsevier, vol. 33(5), pages 619-632, March.
    13. Forbes, Kevin F. & Zampelli, Ernest M., 2002. "Technology and the exploratory success rate in the U.S. onshore," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 319-334.
    14. Richard G. Newell & Brian C. Prest & Ashley Vissing, 2016. "Trophy Hunting vs. Manufacturing Energy: The Price-Responsiveness of Shale Gas," NBER Working Papers 22532, National Bureau of Economic Research, Inc.

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