DRILL-BIT PARITY: SUPPLY-CHAIN LINKS IN OIL AND GAS MARKETS
Payne Institute Fellow and Mines Professor Ben Gilbert and Gavin Roberts provide a model and empirical evidence of supply-side connections between oil and gas markets. Oil and gas production require common inputs: drilling rigs and specialized labor. Competition for inputs creates a cost-spillover channel through which a price shock for one commodity reduces drilling for, and production of, the other commodity. Oil wells produce associated gas, while gas wells produce associated liquid hydrocarbons. This creates an associated-commodity channel through which a price shock for one commodity might increase or decrease drilling for the other commodity, and always increases production of, the other commodity. April 8, 2020.