Trophy Hunting vs. Manufacturing Energy: The Price Responsiveness of Shale Gas
Is unconventional natural gas supply more responsive to price changes than conventional gas? This analysis suggests that the answer is yes—specifically, almost three times as responsive, due entirely to greater well productivity.
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 long-run drilling elasticity of 0.7 for both conventional and unconventional sources. Nonetheless, because unconventional wells produce on average 2.7 times more gas per well than conventional ones, the longrun price responsiveness of supply is almost 3 times larger for unconventional compared to conventional gas.
- Unconventional extraction of natural gas is commonly said to resemble a “manufacturing process” in that operators have much more flexible and certain control over their production levels than with traditional drilling.
- To the extent that the production of unconventional gas is more price responsive than traditional drilling, the shale boom has likely “flattened out” the US natural gas supply curve, thereby reducing price volatility.
- This study uses detailed data from approximately 62,000 gas wells drilled in Texas during 2000–2015 to examine whether unconventional gas supply is in fact more responsive to price changes than conventional sources, as has been widely conjectured.
- The analysis considers separate stages of the natural gas extraction process: drilling investment, time to completion and initial production, and the profile of output over time.
- According to the analysis, unconventional gas supply is approximately 2.7 times as responsive to price changes compared to conventional gas, due entirely to greater well productivity.
- It also finds much lower percent variation in unconventional well production, consistent with the notion of a manufacturing process.
Richard G. Newell
President and CEO, Resources for the Future
Dr. Richard G. Newell is the President and CEO of Resources for the Future. From 2009 to 2011, he served as the administrator of the US Energy Information Administration, the agency responsible for official US government energy statistics and analysis.
Brian C. Prest
Fellow; Director, Social Cost of Carbon Initiative
Brian Prest is an economist and fellow at Resources for the Future specializing in climate change, oil and gas, and energy economics.
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