Impacts of COVID-19 on Tight Oil Supply: Evidence from a Price Responsiveness Econometric Model

EfD Discussion Paper
1 October 2020

Yan Chen

Abstract

The coronavirus pandemic is having substantial impacts on the oil and gas industry. Following the plummeting of oil prices in March 2020, the future supply of tight oil in the United States has become crucial for government policy. Market prediction, however, is not well established. In this paper, I construct an econometric model to quantify the price responsiveness of tight oil supply in the United States using well-level play-specific panel data, and use the model to analyze the influence of coronavirus pandemic on tight oil supply. The regression results show that the oil price elasticity was 2.0 for tight oil drilling and 0.5 for tight oil production in 2010-2016. The gas price elasticity is insignificant in both cases. Forecasts using the estimated econometric model show that tight oil production will decrease by 1.3-2.3 MMbbl/d (16-28%) under different price scenarios. The coronavirus pandemic will also cause a significant reduction in tight oil drilling activities. However, tight oil is not likely to be a “swing producer” and OPEC will continue to lead production cuts under low prices.

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Publication reference
EfD Discussion Paper 20-25
Publication | 14 October 2020