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The Relationship Between Oil Price and Costs in the Oil Industry

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  • Gerhard Toews
  • 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 & Alexander Naumov, 2015. "The Relationship Between Oil Price and Costs in the Oil Industry," The Energy Journal, , vol. 36(1_suppl), pages 237-254, June.
    • Handle: RePEc:sae:enejou:v:36:y:2015:i:1_suppl:p:237-254
    DOI: 10.5547/01956574.36.SI1.gtoe
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    References listed on IDEAS

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    1. Adelman, M A, 1990. "Mineral Depletion, with Special Reference to Petroleum," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 1-10, February.
    2. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
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