The article I read recently is about a topic that has caught my attention. It is called "Shale Oil Boom Takes Hold on the Plains" by David LaGesse of National Geographic (http://news.nationalgeographic.com/news/energy/2011/09/110928-shale-oil-boom-colorado-great-plains). The article talks about the recent discovery of a new oil drilling technique that makes it economical to drill and extract oil here in the U.S. Experts have always know about the vast amounts of oils located here in our own country, such as the Bakken fields in North Dakota, but the problem has been that it is too costly to extract. However, in recent months, a new technique to drill and extract crude oil, which has been adopted from the same technique to extract natural gas, is being used to extract crude oil. The technique, called fracking, makes more sense in the crude oil market than the natural gas market because the demand and price for oil has remained high whereas the same can not be said for natural gas. This recent discovery has changed the market for crude oil completely. The course text book explains that "...a seller that uses a technology with a lower variable cost will lower its average, average variable, and marginal cost curves" (pg. 89). One of the main reasons why more oil is not produced in the U.S. is the cost to drill and extract, but with improved technology, the costs to oil-drilling companies is significantly lower and more profitable. The text book also explains, "...a change in the price of any input will cause a shift of the entire market supply curve" (pg.102). The article is the perfect example of this economic principle. The article explains that "...oil production in the U.S. portion of the Bakken went from 3,000 barrels a day in 2005 to about 400,000 now". The improved technology has made it cheaper for firms to drill and recover more oil and increase the quantity they supply at a cheaper price, which (should) mean cheaper prices for us at the gas pumps. Drill, baby, drill!


Aaron said...

I found your post, as well as the information about the new oil extracting technology, very interesting. Thanks a lot! While the idea of efficiently drilling for and using our own natural resources such as crude oil sounds wonderful, I’m left with many questions surrounding this topic. For example: Is this technology brand new? If not, why have we waited so long to use it? And, if we’ve known that there were massive deposits of crude oil within the borders of the U.S. then why are we only now starting to access them? Don’t get me wrong, because the idea of extracting and using our own oil is thrilling; however, the questions surrounding this topic could go on forever.

The textbook explains what is meant be Technical Efficiency and I thought it applied to your post. This term is defined as "providing an item at the minimum possible cost". While oil tycoons are discovering this new, lost-cost extracting technology I still wonder if they have the consumer’s interest in mind at all. As their production costs decrease will we reap any of the rewards? Is there such thing as "technical efficiency" in the oil industry?

Dr. Tufte said...

-1 on Mitchell Stone for a poorly formatted link.

It's so funny that you posted about this. I teased my ECON 3020 class all last semester about this. There was so much good news coming out of North Dakota that I started bringing it up on purpose just to make them laugh. :)

Anyway, I appreciate the economics that Mitchell has put in, but I'd like to add something. In drilling, the well is a fixed cost, while the production has variable costs. The importance of fracking is really to distribute the fixed costs over more production (to lower average fixed costs).

Aaron: the reason that this hasn't been exploited before is that the breakeven price for shale fracking, and also for tar sand extraction in Canada, is about $80 per barrel. We've been at that level for a few years, and the boom that was predicted happened.

FWIW: Economists tend to view that $80 per barrel threshold as the long-term price of oil. There so much tar sand and oil shale that once we hit that price, there's little reason for prices to stay up if they are forced up by market factors.

BTW: if you have a degree, you can apparently start work in the 6 figures in western North Dakota. You won't start in your field though ... they're using a degree as a credential to sort people out, for jobs like driving trucks.

Farva said...

The price of oil has also played a large part in U.S. oil exploration. Cental Utah has recently experienced an "oil boom" so to speak. Numberous oil companies came into central utah around 2005 looking for oil. They actually drilled on my family's farm in 2006, but were not able to get deep enough to where they suspected the oil would be (very sad day). They told us they knew cental Utah had large oil deposits and actually a few companies did some minor exploration in the 1980's but couldn't get enough oil out of the rocks to justify it. They told my dad that back when oil was $40 a barrel it didn't make sense to extract it from the rocks or shell. However, now that oil was up to $80-$100 dollars a barrel it made sense. Im not sure if this new technology was around in 2005 or not, but i'm sure it and the increased price of oil will continue to have a huge impact on the U.S. and other countries' oil explorations.

Dr. Tufte said...

Yes, the technology was around in 2005, but there have been big network externalities leading to its wider adoption since then.