SMU SOE Economics Lecture Series (Dec 9, 2021, 2.00pm-4.30pm): Industrial Organization of Upstream Oil and Gas

KEYNOTE PRESENTATION

Market Power in the Global Oil Market: Weflare Analysis

We provide an empirical framework to measure the welfare impact of market power that
materializes through coordination of production (i.e. cartel) in the global crude oil market.
We leverage unique micro data on cost and production to quantity the dead weight loss and productivity inefficiency due to the OPEC cartel. We introduce a framework that recognizes the likely inter-temporal tradeoff that producers face when setting production levels. We rely on an estimated demand system for oil and we consider a range of counterfactual oil supply functions to quantity the welfare loss due to market power. The counterfactual supply curves imply counterfactual price paths that suggest a sizeable impact of market power on the global oil market. This together with the information on field-level costs allows for a model-consistent notion of lost gains from trade due to market power. We find that the welfare impact is large, implying a world-wide revenue tax (on every aspect of economic activity) of about 0.15%, or put differently about 5 trillion USD (in 2014).

Please view the paper here.

PRESENTATION 2

Incomplete Environmental Regulation and Spatial Equilibrium in the Offshore Oil and Gas Industry

How effective is local regulation when production occurs in a global market and capital is mobile? When environmental regulations differ between regions capital may relocate, resulting in spatial misallocation and ‘leakage’ of pollution and profits. In this paper I build an empirical framework to study incomplete regulation in a decentralized capital market, where capital is mobile and production occurs across multiple locations. The model extends the spatial location-choice and matching literature in industrial organization to accommodate two-sided vertical firm heterogeneity. Using novel contract and location data, I apply the framework to the global market for deepwater oil rigs. Offshore rigs are marine vessels that move around the ocean drilling wells, matching with oil companies like BP and Chevron to produce wells. Local changes in drilling standards and other regulations spur equilibrium rig relocation. The main policy finding is that incomplete regulations, such as unilateral increases in drilling standards, cause large shifts in profits and (expected) oil spilled to other markets through the capital relocation channel. In contrast, I find that more complete regulation - like a coordinated global agreement on drilling standards - would be significantly more effective than uncoordinated policies.

Please view the paper here.

PRESENTATION 3

Technology Adoption in Upstream Oil & Gas: Enhanced Oil Recovery in the North Sea

This paper studies innovation adoption in the North Sea upstream oil and gas industry. The focus is on the adoption of "enhanced oil recovery,'" a technology allowing eligible fields to increase production by optimizing reservoir pressure. With detailed firm- and field-level data between 1970-2010, we show that this technology increases efficiency. However, we find that adoption was not universal, as field operators face a trade-off between short-term investment costs and long-term efficiency gains. This trade-off decreases government revenues by limiting resource extraction. We examine factors that are responsible for the observed adoption rate and discuss potential policies.