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The Relationship Between Oil Price and Costs

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  • 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 costs 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 2% with a lag of 4 and 6 quarters respectively; (ii) positive shocks to drilling activity affect the oil price negatively; (iii) shocks to costs of drilling do not have a permanent effect on the price of oil.

Suggested Citation

  • Alexander Naumov, 2015. "The Relationship Between Oil Price and Costs," OxCarre Working Papers 152, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    • Handle: RePEc:oxf:oxcrwp:152
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    References listed on IDEAS

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    Cited by:

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    2. Girard, Victoire & Kudebayeva, Alma & Toews, Gerhard, 2020. "Inflated Expectations and Commodity Prices: Evidence from Kazakhstan," GLO Discussion Paper Series 469, Global Labor Organization (GLO), revised 2020.
    3. Smith, James L. & Lee, Thomas K., 2017. "The price elasticity of U.S. shale oil reserves," Energy Economics, Elsevier, vol. 67(C), pages 121-135.
    4. Nicoleta Iliescu, 2018. "Long-run co-movements between oil prices and rig count in the presence of structural breaks," Economics Bulletin, AccessEcon, vol. 38(2), pages 1171-1179.
    5. Ansari, Dawud, 2017. "OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 111, pages 166-178.
    6. Massimiliano Caporin & Fulvio Fontini & Rocco Romaniello, 2024. "The Asymmetric Relationship between Conventional/Shale Rig Counts and WTI Oil Prices," The Energy Journal, , vol. 45(2), pages 137-187, March.
    7. Cust,James Frederick & Rivera Ballesteros,Alexis & Zeufack,Albert G., 2022. "The Dog that Didn’t Bark : The Missed Opportunity of Africa’s Resource Boom," Policy Research Working Paper Series 10120, The World Bank.
    8. Malova, Aleksandra & van der Ploeg, Frederick, 2017. "Consequences of lower oil prices and stranded assets for Russia's sustainable fiscal stance," Energy Policy, Elsevier, vol. 105(C), pages 27-40.
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    10. Mr. Alberto Behar & Robert A Ritz, 2016. "An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash," IMF Working Papers 2016/131, International Monetary Fund.
    11. Khalifa, Ahmed & Caporin, Massimiliano & Hammoudeh, Shawkat, 2017. "The relationship between oil prices and rig counts: The importance of lags," Energy Economics, Elsevier, vol. 63(C), pages 213-226.
    12. Berg, Florian & Ceccarelli, Marco & Heeb, Florian & Ivashchenko, Alexey & Rigobón, Roberto & Zwinkels, Remco C. J., 2025. "The market for voluntary carbon offsets," SAFE Working Paper Series 462, Leibniz Institute for Financial Research SAFE.
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    14. Alberto Behar & Robert A. Ritz, 2016. "OPEC vs US shale oil: Analyzing the shift to a market-share strategy," Working Papers EPRG 1612, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    15. Philippe Le Billon & Berit Kristoffersen, 2020. "Just cuts for fossil fuels? Supply-side carbon constraints and energy transition," Environment and Planning A, , vol. 52(6), pages 1072-1092, September.
    16. Pedro Moreno Alonso & Antonio Mu oz San Roque, 2021. "Oil Costs and Prices: An Empirical Causality Analysis," International Journal of Energy Economics and Policy, Econjournals, vol. 11(3), pages 546-554.

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    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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