Drill-bit PArity:
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Previous economic analyses focused on market relationships between crude oil and natural gas centered primarily on demand-side considerations. We provide evidence that two important supply-side connections play important roles in understanding crude oil and natural gas market integration. First, crude oil production and natural gas production require a common capital input: rotary drilling rigs. Competition for this capital input should be expected to keep the difference between crude oil and natural gas priced in check. Second, crude oil wells produce associated gas, while natural gas wells wells produce associated oil. This latter supply-side connection could cause divergence in crude oil prices and natural gas prices. Understanding which effect dominates at a particular time is essential to understanding oil and gas market integration. Empirical evidence indicates that drilling rig competition has come to play a more important role since the onset of increasing production from shale gas and tight oil wells, which began in the mid-2000's.
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decomposing natural gas price elasticity of supply:
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Economists and petroleum engineers view natural gas production from quite different perspectives. Economists focus on the role of market signals, while petroleum engineers focus on the geological characteristics of natural gas reservoirs. We analyze a large dataset of well-level natural gas production from Wyoming in order to tease out the respective roles played by market signals and geological characteristics. We find that geological characteristics are the primary determinant of production at the individual well level, while natural gas producers respond to market signals through choice of drilling rates and locations. We show this by estimating price elasticities of production on three margins: production from previously-drilled wells, peak-production rates from new wells, and drilling rates. Our estimation of the price-elasticity of production from previously-drilled wells uses a novel fixed-effects approach based on petroleum-engineering knowledge. This estimation indicates an economically insignificant price-elasticity of production from previously-drilled wells, indicating the petroleum-engineering view dominates. We complete the analysis by showing the price-elasticity of peak-production is negative, while drilling is inelastic, but positive and economically significant. The latter indicates that average well-level productivity decreases when prices increase, because less-productive wells become profitable to drill when prices increase. This indicates that at least part of the increasing productivity from shale wells cited in several studies is related to persistently low gas prices, rather than learning or technological improvement.
Resource economists have begun integrating petroleum-engineering knowledge into economic models of natural gas and crude oil extraction. To borrow on recent paper's analogy, gas and oil extraction problems are "keg-tapping" problems rather than "cake-eating" problems. The keg-tapping problem amounts to converting drilling prospects into production capacity. Drilling prospects and natural gas or crude oil production capacity are the exhaustible resources of interest in these models. We advance this this line of research by explicitly recognizing the cost heterogeneity of drilling prospects. Wells drilled in the 19th Century in Pennsylvania were often less than 100 feet deep, while wells drilled more recently in Eastern Russia reached depths of more than 40,000 feet. Clearly, drilling costs vary by drilling prospect. We also explicitly recognize the existence of substitutes for natural gas and oil by moving away from the assumption that the marginal utility of production grow without bound as extraction approached zero. We construct an extraction model that accounts for petroleum-engineering knowledge as well as the cost heterogeneity of drilling prospects. We focus on the case in which natural gas and crude oil drilling prospects are left unconverted to production capacity at the end of the time horizon, which we argue is the most relevant case. This case is feasible if the marginal cost of converting a drilling prospect is eventually greater than the associated marginal benefit, which is represented by a discounted stream of future utility. Simulations indicate this model is consistent with cyclical price fluctuations even with stationary demand, which is more consistent with observed prices than previous models.
Individual contributions to public good investments are subject to the classic problem of free riding. We investigate the possibility of overcoming the free-riding problem through creating social capital via communication. Drawing on social capital literature and organizational management literature, we design a novel public-goods experiment with two kinds of communication treatments. The experiment is designed to allow for robust difference-in-differences estimation of treatment effects on individual contributions to public goods. The first treatment involves structured communication via a task-oriented team-building exercise. The second involves undirected communication via a free-form interaction exercise. Two additional treatments are used to examine whether the effects of social capital on free-riding are limited at the group level or extend beyond the group. These treatments involve reallocating subjects to new groups after they participate in structured or free-form communication. We find that both forms of social capital creation increase public good contributions when individuals stay in the same group. Unstructured communication brings public good contributions closer to the efficient level than team-building when individuals remain in the same group after treatment. Further, the effect of unstructured communication is more persistent. However, when individuals are allocated to new groups, there is far less evidence of social capital creation: team-building causes a small increase in public good investments, but unstructured communication no longer has an effect.
Economic literature related to Optimum Currency Areas (OCA's) dictates that countries should have symmetrical demand shocks and highly integrated markets if currency sharing is to be optimal. We show that the European Union fails to meet the criteria for an OCA, because asymmetric demand shocks occur in the European Union (EU), and labor and capital markets are not well integrated across countries in the EU. Periods of of somewhat symmetrical demand shocks and integrated markets can be explained by increased government expenditures in some countries. This leads to a conundrum for the European Union. While "austerity packages" reduced government debt and deficits, they lead to market disintegration and asymmetric demand shocks, which underscores the current dilemma faced by the EU. We argue there are only two options if the EU is to survive: (1) healthy economies could give money to troubled ones, thus allowing government supported integration to continue, or (2) troubled economies could implement austerity, causing upheaval and disintegration in the short-run, but possibly placing the countries in the EU towards market integration in the long-run. William E. Morgan Graduate Award, Department of Economics and Finance, University of Wyoming, 2015/2016 Academic Year. |