The effect of oil and gas price and price volatility on rig activity in tight formations and OPEC strategy

Exploration of tight oil and gas formations has significantly increased US oil and gas production in recent years. However, detailed economic analysis of this production, including identification of the break-even price (BEP), the measure of price used to plan exploration and development, a synergy between price volatility and the BEP, and a feedback effect of tight oil production on oil prices, has yet to be carried out. Here we show that the BEP for rigs used to drill oil wells is $20 (similar to$50 nominal), the effect of price volatility on rig activity declines as the price for crude oil or natural gas moves above or below this BEP, firms use futures prices (not spot prices) to plan exploration and development, and new rig productivity affects both drilling activity and oil prices. The latter indicates that increases in new rig productivity can account for much of the 2014 oil price decline.