ABSTRACT
Over the past 40 years, U.S. drilling activity has fluctuated substantially. Over this period there have been some significant changes in price or in U.S. energy policy to prevent or allow price changes. As a result, a substantial body of theory has grown up to relate oil and gas prices to drilling activity.
However, a detailed analysis of drilling activity indicates that price, while important, often serves only as a proxy for the economic factors that actually affect industry activity. Energy policies regulating price, such as the Phillips decision regulating the wellhead gas price in interstate markets, have shown limited impacts on drilling activity. Regulations or market conditions affecting oil and gas production rates, however, have significantly affected drilling activity.
This paper assesses the periods in the past when there were significant changes in the level of industry activity to investigate the role that price has played in industry decisions. The analysis will consider periods during which activity has expanded and periods during which activity has declined. The analysis indicates that cash flow plus profitability, not price, dominate the industry's decisions. Thus, the mere increase or decrease in price is not sufficient to cause substantial changes in industry activity.
