More Where that Came from: Induced Innovation in the American Oil and Gas Sectors

Abstract

Induced innovation theory suggests that a change in relative input prices will result in a substitution effect not only toward cheaper alternatives, but toward innovative activity that will lead to new alternatives. Here we test whether the same holds true for output prices: does innovation in the oil and gas sector respond positively to a rise in energy prices? We model the share of total granted U.S. patents that are related to oil and gas as a function of expected future commodity prices, production levels of each commodity and previous innovations (or stocks of knowledge). We find a significant, positive and highly elastic correlation between expected commodity prices and innovation.