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The effect of oil and gas price and price volatility on rig activity in tight formations and OPEC strategy

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  • Esmail Ansari

    (Institute of Management and Economics, Clausthal University of Technology)

  • Robert. K. Kaufmann

    (Boston University)

Abstract

Exploration of tight oil and gas formations has significantly increased US oil and gas production in recent years. However, detailed economic analysis of this production, including identification of the break-even price (BEP), the measure of price used to plan exploration and development, a synergy between price volatility and the BEP, and a feedback effect of tight oil production on oil prices, has yet to be carried out. Here we show that the BEP for rigs used to drill oil wells is $20 (~$50 nominal), the effect of price volatility on rig activity declines as the price for crude oil or natural gas moves above or below this BEP, firms use futures prices (not spot prices) to plan exploration and development, and new rig productivity affects both drilling activity and oil prices. The latter indicates that increases in new rig productivity can account for much of the 2014 oil price decline.

Suggested Citation

  • Esmail Ansari & Robert. K. Kaufmann, 2019. "The effect of oil and gas price and price volatility on rig activity in tight formations and OPEC strategy," Nature Energy, Nature, vol. 4(4), pages 321-328, April.
    • Handle: RePEc:nat:natene:v:4:y:2019:i:4:d:10.1038_s41560-019-0350-1
    DOI: 10.1038/s41560-019-0350-1
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    Cited by:

    1. Zhang, Xiaokong & Chai, Jian & Tian, Lingyue & Pan, Yue & Wang, Jiaoyan, 2024. "What drives the high-risk spillover of benchmark oil prices into China's LNG market?," Energy, Elsevier, vol. 306(C).
    2. Dean Fantazzini & Nikita Kolodin, 2020. "Does the Hashrate Affect the Bitcoin Price?," JRFM, MDPI, vol. 13(11), pages 1-29, October.
    3. Ansari, Dawud & Holz, Franziska & Al-Kuhlani, Hashem, 2020. "Energy Outlooks Compared: Global and Regional Insights," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 9(1), pages 21-42.
    4. Sun, Hongyue & Ebadi, Abdol Ghaffar & Toughani, Mohsen & Nowdeh, Saber Arabi & Naderipour, Amirreza & Abdullah, Aldrin, 2022. "Designing framework of hybrid photovoltaic-biowaste energy system with hydrogen storage considering economic and technical indices using whale optimization algorithm," Energy, Elsevier, vol. 238(PA).
    5. Karasu, Seçkin & Altan, Aytaç, 2022. "Crude oil time series prediction model based on LSTM network with chaotic Henry gas solubility optimization," Energy, Elsevier, vol. 242(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. Arampatzidis, Ioannis & Dergiades, Theologos & Kaufmann, Robert K. & Panagiotidis, Theodore, 2021. "Oil and the U.S. stock market: Implications for low carbon policies," Energy Economics, Elsevier, vol. 103(C).
    8. Jamil, Faisal, 2024. "Empirical analysis of investment in Pakistan’s upstream sector," Resources Policy, Elsevier, vol. 88(C).
    9. Ericson, Sean J. & Kaffine, Daniel T. & Maniloff, Peter, 2020. "Costs of increasing oil and gas setbacks are initially modest but rise sharply," Energy Policy, Elsevier, vol. 146(C).
    10. Mason, Charles F. & Wilmot, Neil A., 2020. "Jumps in the convenience yield of crude oil," Resource and Energy Economics, Elsevier, vol. 60(C).
    11. Zaid Zuhaira & Jizu Li & Hayder Dhahir Mohammed, 2024. "The future of the shale industry in light of the fluctuations in global oil prices," Energy & Environment, , vol. 35(3), pages 1573-1596, May.
    12. Kaufmann, Robert K., 2023. "Energy price volatility affects decisions to purchase energy using capital: Motor vehicles," Energy Economics, Elsevier, vol. 126(C).

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