Abstract
I examine evidence for a recent acceleration in the impact of technological change in the extraction of oil and natural gas on OPEC, associated with hydraulic fracturing and horizontal drilling. I estimate world demand for and non OPEC supply of crude oil simultaneously, representing technological progress using deterministic trends. The data span 45 years of history, but Zivot Andrews tests identify breaks in trend entirely within the last eight years. Drilling for tight oil causes a break in non-OPEC supply in 2011:III. Shale gas production partly explains a deceleration in demand for crude oil in 2014:IV. Both breaks have a substantial effect on price elasticity of net demand to OPEC going forward, but OPEC retains the same level of market power that it currently has, as measured by the elasticity of demand net of non OPEC production for an increase in price. I conclude that policies designed to counteract OPEC’s market power are still needed.
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