Recent Developments in Domestic Oil and Gas Markets

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Zurich C
Hosted By: American Economic Association
  • Chair: Richard Newell, Duke University

Trophy Hunting versus Manufacturing Energy: The Price-Responsiveness of Shale Gas

Richard Newell
,
Duke University
Brian Prest
,
Duke University
Ashley Vissing
,
Duke University

Abstract

We analyze the relative price elasticity of unconventional versus conventional natural gas extraction. We separately analyze three key stages of gas production: drilling wells, completing wells, and producing natural gas from the completed wells. We find that the important margin is drilling investment, and neither production from existing wells nor completion times respond strongly to prices. We estimate a drilling elasticity of 0.7 for both conventional and unconventional sources. Nonetheless, because unconventional wells produce about 3 times more gas per well than conventional ones, the long-run price responsiveness of supply is about 3 times larger for unconventional compared to conventional gas.

Economics and Externalities of Moving Crude Oil by Pipelines and Railroads: Evidence From the Bakken Formation

Karen Clay
,
Carnegie Mellon University
Akshaya Jha
,
Carnegie Mellon University
Nicholas Muller
,
Middlebury College
Randall Walsh
,
University of Pittsburgh

Abstract

This paper provides the first estimates of the quantities and costs of the global and local pollutants generated by long distance transportation of domestically produced crude oil from well locations to U.S. refineries. While such transportation has generated intense policy debate, focused mainly on a small number of high-profile rail and pipeline spills and accidents, a second important externality from crude oil transportation – air pollution – has been largely overlooked. Our analysis draws on shipment-level data from the Surface Transportation Board (STB) Confidential Waybill Sample for the year 2014, estimates of the electricity consumed by pumping stations in order to pump crude oil through pipelines from Genscape, an industry data provider, and models of locomotive and power plant emissions. These location-specific emissions are coupled with the AP2 model to estimate monetary air pollution damages for pipeline and railroad transport of crude oil. We find that the cost of air pollution is much greater for rail than for pipelines. Average air pollution costs per million barrel miles are $3,825 for rail and $569 for pipelines. The cost of air pollution is also much greater than the costs of spills and accidents for both rail and pipelines. Estimates from PHMSA imply that spill and accident costs per million barrel miles are $230 for rail and $44 for pipelines.

Pipeline Incidents and Local Aversion to Infrastructure Expansion

Evan Herrnstadt
,
Harvard University
Richard Sweeney
,
Boston College

Abstract

The geography of hydrocarbon production in the United States has changed dramatically in recent years, largely due to the advent of hydraulic fracturing. To capture the full benefits of this technological advancement, significant increases in and improvements to the existing pipeline network are required. The primary impediment to these changes is public concern over the safety and environmental impacts of pipelines. Despite the intensity of public opposition, little is known about homeowners’ actual willingness-to-pay to avoid living near a pipeline. This paper fills that gap using three different empirical strategies. First, we obtain an unbiased estimate of homeowners’ “steady-state”, or cross-sectional, WTP. To overcome the endogeneity of pipeline locations, we construct a counterfactual network of straight lines connecting major supply and demand centers and use this network as an instrument for the existing network. Second, we consider the effect of major pipeline expansions and incidents on this steady-state WTP. Using transaction-level housing data, we examine house prices before and after these events, near and far from the pipeline in a difference-in-differences framework. While this produces a causal estimate of capitalization, it is a convolution of multiple mechanisms: a publicized accident would simultaneously shock risk perceptions and general awareness of pipelines. Third, we exploit a specific natural experiment to further investigate these competing mechanisms. In 2001, a natural gas transmission pipeline owned by Pacific Gas and Electric exploded in San Bruno, CA, killing eight people. Nine months later, PG&E sent flyers to all households living within 2000 feet of any of their California transmission pipes informing them of their proximity to the pipeline. We use a difference-in-difference approach to analyze property values near and far from PG&E transmission pipes, before and after this mailing, to try to isolate the pure information effect.

The Impact of the Fracking Boom on Arab Oil Producers

Lutz Kilian
,
University of Michigan

Abstract

This paper makes four contributions. First, it investigates the extent to which the U.S. fracking boom has caused Arab oil exports to decline since late 2008. Second, the paper quantifies for the first time by how much the U.S. fracking boom has lowered the global price of oil. Using a novel econometric methodology, it is shown that in mid-2014, for example, the Brent price of crude oil was lower by $10 than it would have been in the absence of the fracking boom. Third, the paper provides evidence that the decline in Saudi net foreign assets between mid-2014 and August 2015 would have been reduced by 27% in the absence of the fracking boom. Finally, the paper discusses the policy choices faced by Saudi Arabia and other Arab oil producers.
Discussant(s)
Thomas Covert
,
University of Chicago
Ryan Kellogg
,
University of Michigan
Nicholai Kuminoff
,
Arizona State University
Ana Maria Herrera
,
University of Kentucky
JEL Classifications
  • Q4 - Energy
  • Q5 - Environmental Economics