Facebook LinkedIn Youtube Twitter

IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

The Relationship Between Oil Price and Costs in the Oil Industry

We propose a simple structural model of the upstream sector in the oil industry to study the determinants of costs with a focus on its relationship with the price of oil. We use the real oil price, data on global drilling activity and real cost of drilling to estimate a three-dimensional VAR model. We use short run restrictions to decompose the variation in the data into three structural shocks. We estimate the dynamic effects of these shocks on drilling activity, costs of drilling and the real price of oil. Our main results suggest that (i) a 10% increase (decrease) in the oil price increases (decreases) global drilling activity by 4% and costs of drilling by 3% with a lag of 4 and 6 quarters respectively; (ii) positive shocks to drilling activity affect the oil price negatively within a year; (iii) shocks to cost of drilling have a relatively small and statistically insignificant effect on the price of oil.

Download Executive Summary Purchase ( $25 )

JEL Codes: L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, Q41: Energy: Demand and Supply; Prices, Q43: Energy and the Macroeconomy, Q35: Hydrocarbon Resources, D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

Keywords: Natural Resource Extraction, Crude Oil Price, Upstream Cost

DOI: 10.5547/01956574.36.SI1.gtoe

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.

Published in Volume 36, Adelman Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.