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Jump Processes in the Market for Crude Oil

Neil A. Wilmot and Charles F. Mason

Year: 2013
Volume: Volume 34
Number: Number 1
DOI: 10.5547/01956574.34.1.2
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In many commodity markets, the arrival of new information leads to unexpectedly rapid changes--or jumps--in commodity prices. Such arrivals suggest the assumption that log-return relatives are normally distributed may not hold. Combined with time-varying volatility, the possibility of jumps offers a potential explanation for fat tails in oil price returns. This article investigates the potential presence of jumps and time-varying volatility in the spot price of crude oil and in futures prices. The investigation is carried out over three data frequencies (Monthly, Weekly, Daily), which allows for an investigation of temporal properties. Employing likelihood ratio tests to compare among four stochastic data-generating processes, we find that that allowing for both jumps and time-varying volatility improves the model's ability to explain spot prices at each level of temporal aggregation; this combination also provides a statistically compelling improvement in model fit for futures prices at the Daily and Weekly level. At the monthly level, allowing for jumps does not provide a statistically significant increase in model fit after incorporating time-varying volatility into the model.

Concentration Trends in the Gulf of Mexico Oil and Gas Industry

Charles F. Mason

Year: 2016
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.cmas
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In this paper, I evaluate patterns of concentration in the Gulf of Mexico oil and gas industry, one of the most important sectors for US production over the past few decades. In the 1990s, production in the Gulf was quite concentrated, and was dominated by large oil companies. But over the past decade or so this concentration has eroded, with recent levels consistent with an unconcentrated industry. These patterns apply for drilling and leasing as well, and are relevant to both shallow and deep water. The overall picture is an industry with strong competition for leases, drilling and production.

Price Elasticity of Supply and Productivity: An Analysis of Natural Gas Wells in Wyoming

Charles F. Mason and Gavin Roberts

Year: 2018
Volume: Volume 39
Number: Special Issue 1
DOI: 10.5547/01956574.39.SI1.cmas
View Abstract

Using a large dataset of well-level natural gas production from Wyoming, we evaluate the respective roles played by market signals and geological characteristics in natural gas supply. While we find well-level production of natural gas is primarily determined by geological characteristics, producers respond to market signals through drilling rates and locations. Using a novel fixed effects approach based on petroleum-engineering characteristics, we confirm that production decline rates tend to be larger for wells with larger peak-production rates. We also find that the price elasticity of peak production is negative, plausibly because firms drill in less productive locations as prices increase. Finally, we show that drilling is price inelastic, although the price elasticity of drilling increased significantly when new technologies began to be adopted in Wyoming. Our results indicate that the popular view that shale wells have larger decline rates than conventional wells can be at least partially explained by the pattern of falling natural gas prices.

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