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Trophy Hunting versus Manufacturing Energy: The Price Responsiveness of Shale Gas

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  • Richard G. Newell
  • Brian C. Prest
  • Ashley B. Vissing

Abstract

We analyze the relative price responsiveness of unconventional versus conventional natural gas extraction. We separately analyze three key stages of gas production: drilling wells, completing wells, and producing natural gas from the completed wells. The most important margin is drilling investment, and neither production from existing wells nor completion times respond strongly to prices. We estimate a gas drilling response of 0.9% per 1% gas price shock, for both conventional and unconventional sources. Nonetheless, because unconventional wells produce about three times more gas per well than conventional ones, the supply response is much larger for unconventional supply. Accounting for changes to the level and composition of drilling activity, the gas supply is about three times more responsive during the "shale era" of 2010-15 compared to 2000-2005. We illustrate how the distinctions between the stages of production (drilling, completion, and production) are key to understanding price responsiveness.

Suggested Citation

  • Richard G. Newell & Brian C. Prest & Ashley B. Vissing, 2019. "Trophy Hunting versus Manufacturing Energy: The Price Responsiveness of Shale Gas," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(2), pages 391-431.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/701531
    DOI: 10.1086/701531
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    Cited by:

    1. Julien Xavier Daubanes & Fanny Henriet & Katheline Schubert, 2021. "Unilateral CO2 Reduction Policy with More Than One Carbon Energy Source," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(3), pages 543-575.
    2. Meier, Felix D. & Quaas, Martin F., 2021. "Booming gas – A theory of endogenous technological change in resource extraction," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    3. Evan M. Herrnstadt & Ryan Kellogg & Eric Lewis, 2020. "The Economics of Time-Limited Development Options: The Case of Oil and Gas Leases," NBER Working Papers 27165, National Bureau of Economic Research, Inc.
    4. Chen, Yan, 2021. "Evaluating the influence of energy prices on tight oil supply with implications on the impacts of COVID-19," Resources Policy, Elsevier, vol. 73(C).
    5. Brown, Jason P. & Maniloff, Peter & Manning, Dale T., 2020. "Spatially variable taxation and resource extraction: The impact of state oil taxes on drilling in the US," Journal of Environmental Economics and Management, Elsevier, vol. 103(C).
    6. Shakya, Shishir & Li, Bingxin & Etienne, Xiaoli, 2022. "Shale revolution, oil and gas prices, and drilling activities in the United States," Energy Economics, Elsevier, vol. 108(C).
    7. Lade, Gabriel E. & Rudik, Ivan, 2020. "Costs of inefficient regulation: Evidence from the Bakken," Journal of Environmental Economics and Management, Elsevier, vol. 102(C).
    8. 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.
    9. Timothy Fitzgerald & Kevin Hassett & Cody Kallen & Casey B. Mulligan, 2020. "An Analysis of Vice President Biden's Economic Agenda: The Long Run Impacts of its Regulation, Taxes, and Spending," Working Papers 2020-157, Becker Friedman Institute for Research In Economics.
    10. Ikonnikova, Svetlana A. & del Carpio Neyra, Victor & Berdysheva, Sofia, 2022. "Investment choices and production dynamics: The role of price expectations, financial deficit, and production constraints," Journal of Economics and Business, Elsevier, vol. 120(C).
    11. 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.
    12. Amir Hallak & Adam Jensen & Gilbert Lybbert & Lucija Muehlenbachs, 2021. "The Oil Production Response to Alberta's Government-Mandated Quota," SPP Communique, The School of Public Policy, University of Calgary, vol. 14(11), March.
    13. Mugabe, Douglas & Elbakidze, Levan & Zaynutdinova, Gulnara, 2020. "Investments of publicly traded versus privately held firms: evidence from stranded growth options in the U.S. shale gas industry," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304361, Agricultural and Applied Economics Association.

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