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Investment and operating choice: Oil and natural gas futures prices and drilling activity

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  • Chen, Fan
  • Linn, Scott C.

Abstract

We present evidence that changes in oil and natural gas field investment measured by drilling rig use respond positively to changes in the futures prices of oil and natural gas, consistent with predictions based upon value-maximizing behavior. These results hold for world regions dominated by private independent oil companies but not national oil companies. In those cases where futures price changes are identified as drivers, the role of spot prices is either absent or weak. The results are robust to several alternative specifications including controls for changes in rig productivity.

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  • Chen, Fan & Linn, Scott C., 2017. "Investment and operating choice: Oil and natural gas futures prices and drilling activity," Energy Economics, Elsevier, vol. 66(C), pages 54-68.
    • Handle: RePEc:eee:eneeco:v:66:y:2017:i:c:p:54-68
    DOI: 10.1016/j.eneco.2017.05.012
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    2. Kannika Duangnate & James W. Mjelde, 2020. "Prequential forecasting in the presence of structure breaks in natural gas spot markets," Empirical Economics, Springer, vol. 59(5), pages 2363-2384, November.
    3. Hu, Haiqing & Wei, Wei & Chang, Chun-Ping, 2019. "Do shale gas and oil productions move in convergence? An investigation using unit root tests with structural breaks," Economic Modelling, Elsevier, vol. 77(C), pages 21-33.
    4. Song-Zan Chiou-Wei & Sheng-Hung Chen & Wei-Hung Chen, 2023. "Asymmetric Effects of Prices and Storage on Rig Counts: Evidence from the US Natural Gas and Crude Oil Markets," Energies, MDPI, vol. 16(15), pages 1-25, August.
    5. Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2021. "An analysis of investor behaviour and information flows surrounding the negative WTI oil price futures event," Energy Economics, Elsevier, vol. 104(C).
    6. 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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    More about this item

    Keywords

    Futures prices; Spot prices; Drilling activity; Price elasticity;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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