Supply flexibility in the shale oil patch and the coronavirus pandemic

U.S. government is considering to buy oil that shale producers leave in the ground, and then producers can later extract and sell the oil for a higher price. Output flexibility in shale oil production gives this possibility, as we first showed in our paper: "Supply Flexibility in the Shale Patch: Evidence from North Dakota"

In the midst of the coronavirus pandemic, the U.S. government is considering to buy oil that shale producers leave in the ground until prices recover. At that point, the producers extract and sell the oil for a higher price than the government paid them, and then repay the government.

https://www.ft.com/content/5f25bf72-6a0c-4b8e-abd4-63b9847b1578?shareType=nongift

Sounds surreal?

Not if you read our paper: "Supply Flexibility in the Shale Patch: Evidence from North Dakota"

https://biopen.bi.no/bi-xmlui/bitstream/handle/11250/2434235/Working_CAMP_2-2017.pdf?sequence=6&isAllowed=y

As a first paper we (H.C. Bjørnland, F.M. Nordvik and M. Rohrer) showed that oil production depends on the extraction technology and that firms using shale oil technology are more flexible in allocating output intertemporally as price signals change.

In particular, we ask if shale oil producers respond to price incentives when producing oil or completing new wells. Constructing a novel welllevel monthly production data set covering more than 16,000 crude oil wells in North Dakota, we find large differences in responses depending on which technology is used: While output from conventional wells appear non-responsive to price fluctuations in the short-term, we find supply elasticity to be positive and in the range of 0.3-0.9 for shale oil wells, depending on wells and firms characteristics.

Furthermore, shale oil firms respond strongly to prices when deciding when to put new oil wells on stream, while conventional oil firms do not.

Overall, our results suggest that firms using shale oil technology are more flexible than those using conventional production techniques. We interpret the supply pattern of shale oil wells to be consistent with the Hotelling theory of optimal extraction.