Monday, May 11, 2009

Oil prices and drilling activity

This chart may help explain why oil prices are rising this year. Drilling activity typically responds to significant changes in oil prices. The red line is the number of active drilling rigs around the world, while the blue line is the inflation-adjusted price of oil. Recently, drilling activity appears to have dropped by more than one might suspect (down 42% in the past seven months), given the historical relationships depicted in the chart. Note that significant exploration activity in the early 1980s set the stage for a big drop in the price of oil in 1986. A lack of significant expoloration activity in recent years probably contributed to the big rise in prices last year.


mxq said...

not all rigs are created equal...horizontal rigs are much more productive than verts.

If you look going back to 1999, horizontal rigs were 8-10%% of total rig count. At the beginning of 09 horz. rigs were of last week they reached a record % of total rigs outstanding at 41%. In fact, don't be surprised if by next week or the week after, we see horz. rigs outpace vert. rigs as a % of total rigs outstanding for the first time ever.

I think the higher productivity and proliferation of horz. technology renders useless a lot of past statstics.

Scott Grannis said...

Good point, I hadn't thought of that. Still, my major point remains, and that is that drilling activity is very responsive to changes in oil prices. It would be an excellent automatic stabilizer, except that the lags between drilling and production are very long. Thus, with volatile monetary policy contributing to push oil prices up and down, drilling activity gets into roller-coaster mode and aggravates the cycles.