Investment and operating choice: Oil and natural gas futures prices and drilling activity

- Causality from changes in futures prices to changes in rig use is documented.
- Data are analyzed for the U.S., Canada, U.K., Middle East, and Latin America.
- No relation is found for activity in countries dominated by NOCs.
- Models are estimated for both oil and natural gas rig activity.
- Changes in futures prices dominate the influence of changes in spot prices.
- Results are robust to controls for rig productivity and model specification.

We present evidence that changes in oil and natural gas field investment measured by drilling rig use respond positively to changes in the futures prices of oil and natural gas, consistent with predictions based upon value-maximizing behavior. These results hold for world regions dominated by private independent oil companies but not national oil companies. In those cases where futures price changes are identified as drivers, the role of spot prices is either absent or weak. The results are robust to several alternative specifications including controls for changes in rig productivity.