The Unconventional Oil Supply Boom: Aggregate Price Response from Microdata

Abstract

We are grateful to Drillinginfo for data used in this study. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Facts and Fiction in Oil Market Modeling

“…Here we focus on the version of this paper discussed by BH. 10 This estimate is higher than that obtained byNewell and Prest (2019), but also has a larger standard error, reflecting the smaller estimation sample. 11 To be precise, the standard error of the elasticity of shale oil producers is the sum of the coefficient on the change in the real price of oil and the coefficient on the change in real price of oil interacted with the shale oil dummy.…”

“…It is useful to review the evidence on the value of the one-month oil supply elasticity with special attention to the limitations of the studies by Bjørnland, Nordvik and Rohrer (2019) andCaldara, Cavallo and Iacoviello (2019) that BH base their arguments on. As the baseline, I start by reviewing the microeconomic evidence provided by Newell and Prest (2019). One might think that this conclusion would be changed when incorporating the onemonth supply elasticity of shale oil producers.…”

“…Thus, the only way for changes in the futures spread to affect oil production directly would be for producers to respond to higher expected oil prices by storing oil below the ground rather than extracting it. For conventional oil, for technological reasons, this is not an option (see Newell and Prest 2019). For shale oil, one could drill, but not frack a well in anticipation of rising prices.…”

“…In this paper, I provide new evidence that BH's agnostic prior specification for that elasticity is inconsistent with extraneous elasticity estimates even after accounting for estimation uncertainty. My discussion draws on recent supply elasticity estimates for U.S. oil producers in Newell and Prest (2019), which is the most comprehensive microeconomic study of oil supply elasticities to date. I further explain why the alternative supply elasticity estimates in Bjørnland, Nordvik and Rohrer (2019) and Caldara, Cavallo and Iacoviello (2019) that BH appeal to are overstating the oil supply elasticity.…”

“…Their estimate is close to the benchmark provided by the theoretical analysis inAnderson, Kellogg and Salant (2018) who showed within an equilibrium model that the short-run oil supply elasticity is zero if adjusting oil production is costly, as tends to be the case in practice. It is important to keep in mind that the quarterly oil supply elasticity estimate inNewell and Prest (2019) is an upper bound on the one-month price elasticity of oil supply we are ultimately interested in. The upper bound of 0.04 considered inZhou (2019) and other recent studies for the one-month supply elasticity is four standard errors above this quarterly point estimate.…”