Estimation of the Time Path of the Supply Price of an Exhaustible Resource: The Case of Oil and Natural Gas

Abstract

Explores the interplay of geopolitical, economic, geological and operational factors that may disrupt the gradual upwards shift of the supply price of non-replenishable resources, specifically oil and natural gas. Describes the econometric identification of the supply price curve for oil and gas in the U.S. using two alternative independent variables: total footage drilled and number of wells completed. Develops a new constrained least squares method, the Thore regression map, of studying shifts of the supply price function over time and uses the techniques to estimate supply price drift. Provides, for the first time, statistical evidence of the time path of the drift upwards of these schedules. Shows that the shifts accelerate during times of upheaval in the oil markets, reflecting the need for a higher risk premium, but may be delayed during times of industry consolidation. A by-product of the analysis is a format for forecasting the supply price of an exhaustible resource.