Evaluating the influence of energy prices on tight oil supply with implications on the impacts of COVID-19

Abstract

Tight oil reached about 8% of world oil production in 2019, a fraction only lower than Russia and Saudi Arabia. With such a large amount, the fluctuation in tight oil production can substantially influence the balance of the world oil market. However, due to the short history of large-scale tight oil development, the influence of oil prices on tight oil supply is not well studied. This paper analyzes the price responsiveness of tight oil supply in the United States using an econometric method and well-level play-specific panel data. The result is further used to estimate the influence of COVID-19 on tight oil production. The regression results show that the oil price elasticity was 2.0 for tight oil drilling and 0.5 for tight oil production in 2010–2016. The gas price elasticity is insignificant in both cases. Forecasts using the estimated econometric model show that tight oil production will decrease by 1.3–2.3 million barrels per day (16–28%) under different price scenarios. However, tight oil is not likely to be a “swing producer” and OPEC will continue to lead production cuts under low prices. The estimated price elasticities contribute to more accurate forecasts of tight oil supply. The conclusions also have significant policy implications for major oil-producing countries.