<p>The best way to get into the various factors at play on this is to look at the Oil Import/Export &amp; Consumption figures for the USA, which the EIA provides in glorious detail (click on the expand button to see the individual charts):</p>

<p><a href="http://www.eia.gov/countries/country-data.cfm?fips=US#pet" rel="nofollow">US Oil Consumption - Import/export</a></p>

<p>It´s not the case as some have claimed that the US has become a net exporter, but Oil imports have significantly declined from their peak in 2006, and the situation with natural gas is equally dramatic. Interestingly though, there has also been a drop in consumption, which I would speculate is partly due to the 2006 recession, and may be a contribution from other energy sources, and may also be increasing energy efficiency developments triggered by the high oil price.</p>

<p>As Brythan quite correctly points out below, this doesn't include the time series data for production/consumption in the rest of the world, which can be found here:</p>

<p><a href="http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&amp;pid=5&amp;aid=2&amp;cid=ww,&amp;syid=2009&amp;eyid=2013&amp;unit=TBPD" rel="nofollow">World Oil Production</a></p>

<p>we can see that total world production has increased by around 6,000 barrels a day since 2005, about 4,000 of which would be the US production increase.</p>

<p>Since the US is still the largest consumer of oil on a per country basis (approximately 2x the Chinese who are currently #2), the combination of this with the drop in imports by the US can be expected to have a significant knock on effect on the price of oil, reducing it globally.</p>

<p>Over the long term it really depends on what you are prepared to believe about the increasing efficiency of solar power, how long the new fields remain competitive, and what other sources of fracking may be available outside the USA, which can be exploited, as to what will happen to the price of oil. Certainly for the next few years though, and ceteris paribus of course, I´d expect oil prices to stay down.</p>

CC BY-SA 3.0
2014-12-23T10:24:23.687Z
-1: I like that you provided links to relevant data. However, it is a little concerning that the economic analysis provided here does not even mention Hotelling's rule (or any similar analysis)---this is usually the first model you should go to when analyzing the price of a non-renewable resource.
jmbejara
CC BY-SA 3.0
2014-12-31T02:50:24.333Z
Hypotheses such as Hotelling´s have to be viewed in the context of their time and the knowledge of the monetary system´s behaviour extant at that time. I appreciate it may be necessary to cite it get through badly set exams, but that´s the only purpose I could recommend it for.
Lumi
CC BY-SA 3.0
2014-12-02T00:53:06.893Z
2014-12-02T22:16:51.037Z
2014-12-02T22:16:51.037Z
Lumi
<p><i>over the past few months, the oil harvested from fracking had come onto the market reducing the price of gas.</i></p>

<p>Obviously, this makes no sense insofar as the oil harvested from fracking displaces oil harvested by other means.  </p>

<p>Absent changes in supply or demand, the price of oil has to rise at the rate of interest.</p>

<p>The development of a new extraction technology is a one-shot increase in supply, which should lead to a one-shot fall in price, followed by a resumption of the ongoing increase at the rate of interest.  It can't (by itself) explain an ongoing fall in price.</p>

CC BY-SA 3.0
2014-12-02T04:02:03.603Z
While in theory you could add the entire new supply of oil made available by fracking at the time of development, in practice it doesn't work like that.  They don't know how much oil they can recover that they couldn't previously.  Until the supply is actually pumped, it doesn't have that much impact.  This is why OPEC can increase oil prices by restricting the flow.  If only the overall supply mattered, then OPEC would be irrelevant.  They can't change supply, only the rate of flow.
Brythan
CC BY-SA 3.0
2014-12-02T04:19:23.337Z
@Brythan:  You are right that there is uncertainty about how much additional oil can be recovered as a result of fracking --- but presumably it's about equally likely that the estimates will be too high or too low, so that the current price could be either too low or too high, but should be about right on average.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T04:21:45.073Z
@Brythan:  Note also that you don't need fracking to have uncertainty about the oil supply.  There is always uncertainty.  I can see reasons to think that fracking might either increase or decrease that uncertainty.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T04:45:38.553Z
Fracking increases uncertainty because it's new.  They don't yet know how much more oil they will be able to get with fracking.  As a result, they can't fully include future supply in their pricing (or even as partially as they could pre-fracking).  Another issue is that if the rate of flow is increasing but demand is stable, the best time to sell is now.  This drops current prices.  But it can't drop current prices too much, as they need to actually be able to supply the gas.  Some of that flow isn't available yet.  So prices drop until the actual flow catches up to the potential flow.
Brythan
CC BY-SA 3.0
2014-12-02T05:20:23.220Z
@Brythan:  I'm not following your story.  First of all, the fact that something is new does not in general mean that it decreases uncertainty, so I don't understand what is supposed to be special about fracking.  Second, even if fracking increases uncertainty, I don't understand why there should be a presumption about which direction the errors will go.  Third, I don't fully get your pricing model.  I think that rather than comment, it would be much better if you wrote out your model in an answer so it would be clear what you're assuming.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T05:53:07.070Z
When something is new, it *increases* uncertainty because it doesn't have history to correct the model.
Brythan
CC BY-SA 3.0
2014-12-02T06:19:46.940Z
@Brythan:  Clearly this is false in general.  I have 1000 gallons of oil in my backyard, and am quite uncertain whether I can extract 0 or 1000 or anything in between.  Now fracking comes along and I become sure that I can extract at least 750.  To rule that out, you've got to be making some unstated assumptions.  It would be better if you stated them.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T06:37:33.597Z
How do you know that you have 1000 gallons of oil in your backyard?  Prior to fracking, you had 100% certainty that without new technology, you could extract 0 gallons.  If you could extract oil with the old methods, you would have already done so.  After fracking, you don't know how much oil is underground nor how much of the oil that is there that you can extract.  Is it 750?  200?  1200?  You don't know, as you have no historical data telling you how much oil you can extract given your indicators.
Brythan
CC BY-SA 3.0
2014-12-02T13:56:49.853Z
@Brythan:  You made a general claim.  I gave you a counterexample.  You responded with a non-counterexample.  A non-counterexample does not beat a counterexample.  If you have a theorem (presumably with some hypotheses you're still keeping secret), it really would be good to post it.  If not, it really would be good to stop blowing hot air.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T14:37:41.913Z
In oil exploration, you do not know how many gallons of oil you have.  What you have is a model of how many gallons you can extract.  In reality, there may be 1000 gallons of oil, but you don't know that.  The only way that you could find that out is by, well, extracting it.  If you knew how much oil you had, then the only uncertainty would be how much oil you could extract which could be offset between methods.  But you don't know that.  This is the first fundamental flaw in your example. Your premise is wrong.
Brythan
CC BY-SA 3.0
2014-12-02T15:23:46.550Z
Brythan:  I made no premise.  I gave a counterexample to your general claim that a new technology must increase uncertainty.  That claim is wrong, because it admits a counterexample.  Perhaps you intend to make some less sweeping claim, but you still haven't told us what it is, let alone proved it.
Steven Landsburg
CC BY-SA 3.0
2014-12-02T23:37:44.847Z
A factually incorrect counter-example.
Brythan
CC BY-SA 3.0
2014-12-23T10:27:44.967Z
+1: This is the only answer here that provides some analysis based on reasoning along the lines of Hotelling's rule---the goto model for analyzing the price of non-renewable resources. (I mean, it needs to be at least acknowledged.) It's a little concerning that perhaps so many people don't see that (this answer currently has 3 downvotes!!).
jmbejara
CC BY-SA 3.0
2014-11-30T16:36:21.493Z
2014-11-30T16:36:21.493Z
Steven Landsburg
<p>This started as a comment on <a href="https://economics.stackexchange.com/a/375/68">Stephen Landsburg's answer</a> but was getting too long for the comment format.  </p>

<p>When a new supply of oil is discovered, it increases the potential new supply.  This will cause prices of oil fields to fall (if everything else is constant).  However, gasoline costs are determined not by the future supply but by current supply.  Gasoline is mildly unstable and will spoil if kept for months or years.  Therefore, there is less time shifting once the gasoline is refined than there is while the oil is still in the ground.  </p>

<p>Most gasoline will be pumped to an end user within a month or two of refinement.  Therefore from the standpoint of day to day prices, it's the amount of gasoline that is currently available that is important.  </p>

<p>Assume that the oil field prices fell due to new supply being discovered.  This can happen quickly.  What takes longer though are actual changes to the end user.  The issue is that you can't just produce as much gasoline as you want immediately.  Since prices are falling, it's to your advantage to sell as much as you can as soon as you can.  But you can only increase current flow if you have slack capacity.  If you don't, you need to add new capacity.  This restricts how much additional flow can be added immediately by existing participants.  </p>

<p>Over time, both existing and new participants can produce oil.  If current participants have a cartel to keep supplies down and prices high, they can either increase their production to take advantage of current prices, keep production the same, or decrease production -- possibly so as to keep overall production (including new participants) the same.  Cartel members may be reluctant to decrease production though.  They are already facing less income due to lower prices.  If they also decrease production, they may increase prices in the near term, but they still face lower prices as more new participants join.  </p>

<p>Cartel members are engaged in monopolistic pricing.  They are producing less than they could in order to maximize profit.  Assuming the new participants do not join the cartel, they will price at competitive pricing.  They'll produce up to the point where the cost to supply including their profit requirement reaches the demand price.  </p>

<p>Note that the actual price will depend on what people do and how the supply is impacted.  My point is that price changes won't necessarily be fully realized immediately.  There's a difference between short run prices and long run prices and the uncertainty of what's actually happening in the long run.  Prices can decrease over time due to a supply shock.  They may not though.  They could also be combined with a demand change.  Or other supply changes.  Or external events unrelated to oil that make people more or less risk averse.  </p>

<p>I am suspicious of Moore's model.  It's plausible but nowhere near definitive (and it aligns with his pro-fracking views, which makes it suspect in my eyes).  I'm also suspicious of Landsburg's model.  I'm concerned that it skips past short term effects to a long run result.  Both models seem overly certain to me.  Unfortunately, I have more questions than answers.  Lumi's link is interesting, but it leaves out demand and supply in the rest of the world.  </p>

<p>The worst part is that any answer should be taken with a grain of salt.  We don't know what the world would be like without fracking.  All answers here are speculating.  Gas prices might have fallen regardless.  Or stayed the same.  Or even increased.  </p>

CC BY-SA 3.0
2014-12-03T00:55:10.933Z
You´re right, those are some good points about petroleum liquidity. The only thing missing is financial speculation - algorithmic trading has played a certain amount of havoc with oil pricing in the past, but that tends to sort itself out over a few months - and it´s next to impossible to quantify.
Lumi
CC BY-SA 3.0
2014-12-23T10:18:44.190Z
You mention "Moore's model." What is this model that you're referring to?
jmbejara
CC BY-SA 3.0
2014-12-23T10:28:44.693Z
@jmbejara  Model may be the wrong word.  Moore's assertion is that the use of fracking has shifted the supply curve such that prices have decreased.  I don't know that Moore has a formal model that can be examined.
Brythan
CC BY-SA 3.0
2014-12-02T07:16:35.323Z
2014-12-02T07:16:35.323Z
2017-04-13T12:51:38.253Z
Brythan
<p>I read an <a href="http://www.foxnews.com/opinion/2014/10/21/real-reason-gas-prices-are-falling" rel="nofollow noreferrer">article</a> about the recent fall of gas prices in the US claiming that the fall in gas prices was due to the expansion of fracking within the US.  The article said that, over the past few months, the oil harvested from fracking had come onto the market reducing the price of gas at road-vehicle refueling stations. </p>

<p>Obviously, I realize that an increase of supply with a constant demand will decrease prices.  But, is there any way to validate the article and conclude that the decrease in oil prices was due to fracking?  The article I read did not go into detail on how they reached their conclusion.  </p>

CC BY-SA 3.0
2014-11-28T22:03:53.620Z
I don't think this question satisfies the requirement of expert-level questions, as stated in the private beta mail.
FooBar
CC BY-SA 3.0
2014-11-28T22:18:55.417Z
Why would you not apply a standard Hotelling model that predicts no increase in price?  In the absence of immediate fracking, does that gas stay in the ground forever?
Steven Landsburg
CC BY-SA 3.0
2014-11-29T05:27:09.250Z
@FooBar I think this is a simple question that invites an expert-level answer. There's a lot of input into energy pricing and putting to bed a naive one-to-one correlation between raw material supply and final consumer price is certainly something in our scope. A good answer could delve into factor inputs, sunk costs, volatility, inventory buffering, and other things often overlooked in news releases.
Jason Nichols
CC BY-SA 3.0
2014-11-29T09:08:28.137Z
Which gas price - Henry Hub spot or something else? What oil - what grade?
410 gone
CC BY-SA 3.0
2014-11-29T15:21:15.767Z
@EnergyNumbers I believe that we are talking about crude oil since the article speaks a little on the implications for OPEC in the future. I put the article in the question if you want to look at it further.
Mathematician
CC BY-SA 3.0
2014-11-30T19:04:52.693Z
@EnergyNumbers The article wasn't very specific, but I edited the question to reflect a more narrow meaning of "gas."
Mathematician
<commodities><price-level><oil><resource-economics>
What is the impact of fracking on oil prices?
Mathematician
# What is the impact of fracking on oil prices?

(Asked by: username_0 on 2014-11-28)

I read an [article](http://www.foxnews.com/opinion/2014/10/21/real-reason-gas-prices-are-falling) about the recent fall of gas prices in the US claiming that the fall in gas prices was due to the expansion of fracking within the US. The article said that, over the past few months, the oil harvested from fracking had come onto the market reducing the price of gas at road-vehicle refueling stations.

Obviously, I realize that an increase of supply with a constant demand will decrease prices. But, is there any way to validate the article and conclude that the decrease in oil prices was due to fracking? The article I read did not go into detail on how they reached their conclusion.

**Tags:** commodities, price-level, oil, resource-economics

> **Comments:**
> **username_1**: I don't think this question satisfies the requirement of expert-level questions, as stated in the private beta mail.  
> **username_2**: Why would you not apply a standard Hotelling model that predicts no increase in price?  In the absence of immediate fracking, does that gas stay in the ground forever?  
> **username_3**: @username_1 I think this is a simple question that invites an expert-level answer. There's a lot of input into energy pricing and putting to bed a naive one-to-one correlation between raw material supply and final consumer price is certainly something in our scope. A good answer could delve into factor inputs, sunk costs, volatility, inventory buffering, and other things often overlooked in news releases.  
> **username_4**: Which gas price - Henry Hub spot or something else? What oil - what grade?  
> **username_0**: @EnergyNumbers I believe that we are talking about crude oil since the article speaks a little on the implications for OPEC in the future. I put the article in the question if you want to look at it further.  
> **username_0**: @EnergyNumbers The article wasn't very specific, but I edited the question to reflect a more narrow meaning of "gas."  

---

## 3 answers

### Answer by username_5 on 2014-12-02. Score: 1 | Accepted answer

The best way to get into the various factors at play on this is to look at the Oil Import/Export & Consumption figures for the USA, which the EIA provides in glorious detail (click on the expand button to see the individual charts):

[US Oil Consumption - Import/export](http://www.eia.gov/countries/country-data.cfm?fips=US#pet)

It´s not the case as some have claimed that the US has become a net exporter, but Oil imports have significantly declined from their peak in 2006, and the situation with natural gas is equally dramatic. Interestingly though, there has also been a drop in consumption, which I would speculate is partly due to the 2006 recession, and may be a contribution from other energy sources, and may also be increasing energy efficiency developments triggered by the high oil price.

As username_7 quite correctly points out below, this doesn't include the time series data for production/consumption in the rest of the world, which can be found here:

[World Oil Production](http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=5&aid=2&cid=ww,&syid=2009&eyid=2013&unit=TBPD)

we can see that total world production has increased by around 6,000 barrels a day since 2005, about 4,000 of which would be the US production increase.

Since the US is still the largest consumer of oil on a per country basis (approximately 2x the Chinese who are currently #2), the combination of this with the drop in imports by the US can be expected to have a significant knock on effect on the price of oil, reducing it globally.

Over the long term it really depends on what you are prepared to believe about the increasing efficiency of solar power, how long the new fields remain competitive, and what other sources of fracking may be available outside the USA, which can be exploited, as to what will happen to the price of oil. Certainly for the next few years though, and ceteris paribus of course, I´d expect oil prices to stay down.

> **Comments:**
> **username_6**: -1: I like that you provided links to relevant data. However, it is a little concerning that the economic analysis provided here does not even mention Hotelling's rule (or any similar analysis)---this is usually the first model you should go to when analyzing the price of a non-renewable resource.  
> **username_5**: Hypotheses such as Hotelling´s have to be viewed in the context of their time and the knowledge of the monetary system´s behaviour extant at that time. I appreciate it may be necessary to cite it get through badly set exams, but that´s the only purpose I could recommend it for.  

---

### Answer by username_2 on 2014-11-30. Score: 3

*over the past few months, the oil harvested from fracking had come onto the market reducing the price of gas.*

Obviously, this makes no sense insofar as the oil harvested from fracking displaces oil harvested by other means.

Absent changes in supply or demand, the price of oil has to rise at the rate of interest.

The development of a new extraction technology is a one-shot increase in supply, which should lead to a one-shot fall in price, followed by a resumption of the ongoing increase at the rate of interest. It can't (by itself) explain an ongoing fall in price.

> **Comments:**
> **username_7**: While in theory you could add the entire new supply of oil made available by fracking at the time of development, in practice it doesn't work like that.  They don't know how much oil they can recover that they couldn't previously.  Until the supply is actually pumped, it doesn't have that much impact.  This is why OPEC can increase oil prices by restricting the flow.  If only the overall supply mattered, then OPEC would be irrelevant.  They can't change supply, only the rate of flow.  
> **username_2**: @username_7:  You are right that there is uncertainty about how much additional oil can be recovered as a result of fracking --- but presumably it's about equally likely that the estimates will be too high or too low, so that the current price could be either too low or too high, but should be about right on average.  
> **username_2**: @username_7:  Note also that you don't need fracking to have uncertainty about the oil supply.  There is always uncertainty.  I can see reasons to think that fracking might either increase or decrease that uncertainty.  
> **username_7**: Fracking increases uncertainty because it's new.  They don't yet know how much more oil they will be able to get with fracking.  As a result, they can't fully include future supply in their pricing (or even as partially as they could pre-fracking).  Another issue is that if the rate of flow is increasing but demand is stable, the best time to sell is now.  This drops current prices.  But it can't drop current prices too much, as they need to actually be able to supply the gas.  Some of that flow isn't available yet.  So prices drop until the actual flow catches up to the potential flow.  
> **username_2**: @username_7:  I'm not following your story.  First of all, the fact that something is new does not in general mean that it decreases uncertainty, so I don't understand what is supposed to be special about fracking.  Second, even if fracking increases uncertainty, I don't understand why there should be a presumption about which direction the errors will go.  Third, I don't fully get your pricing model.  I think that rather than comment, it would be much better if you wrote out your model in an answer so it would be clear what you're assuming.  
> **username_7**: When something is new, it *increases* uncertainty because it doesn't have history to correct the model.  
> **username_2**: @username_7:  Clearly this is false in general.  I have 1000 gallons of oil in my backyard, and am quite uncertain whether I can extract 0 or 1000 or anything in between.  Now fracking comes along and I become sure that I can extract at least 750.  To rule that out, you've got to be making some unstated assumptions.  It would be better if you stated them.  
> **username_7**: How do you know that you have 1000 gallons of oil in your backyard?  Prior to fracking, you had 100% certainty that without new technology, you could extract 0 gallons.  If you could extract oil with the old methods, you would have already done so.  After fracking, you don't know how much oil is underground nor how much of the oil that is there that you can extract.  Is it 750?  200?  1200?  You don't know, as you have no historical data telling you how much oil you can extract given your indicators.  
> **username_2**: @username_7:  You made a general claim.  I gave you a counterexample.  You responded with a non-counterexample.  A non-counterexample does not beat a counterexample.  If you have a theorem (presumably with some hypotheses you're still keeping secret), it really would be good to post it.  If not, it really would be good to stop blowing hot air.  
> **username_7**: In oil exploration, you do not know how many gallons of oil you have.  What you have is a model of how many gallons you can extract.  In reality, there may be 1000 gallons of oil, but you don't know that.  The only way that you could find that out is by, well, extracting it.  If you knew how much oil you had, then the only uncertainty would be how much oil you could extract which could be offset between methods.  But you don't know that.  This is the first fundamental flaw in your example. Your premise is wrong.  
> **username_2**: username_7:  I made no premise.  I gave a counterexample to your general claim that a new technology must increase uncertainty.  That claim is wrong, because it admits a counterexample.  Perhaps you intend to make some less sweeping claim, but you still haven't told us what it is, let alone proved it.  
> **username_7**: A factually incorrect counter-example.  
> **username_6**: +1: This is the only answer here that provides some analysis based on reasoning along the lines of Hotelling's rule---the goto model for analyzing the price of non-renewable resources. (I mean, it needs to be at least acknowledged.) It's a little concerning that perhaps so many people don't see that (this answer currently has 3 downvotes!!).  

---

### Answer by username_7 on 2014-12-02. Score: 2

This started as a comment on [Stephen username_2's answer](https://economics.stackexchange.com/a/375/68) but was getting too long for the comment format.

When a new supply of oil is discovered, it increases the potential new supply. This will cause prices of oil fields to fall (if everything else is constant). However, gasoline costs are determined not by the future supply but by current supply. Gasoline is mildly unstable and will spoil if kept for months or years. Therefore, there is less time shifting once the gasoline is refined than there is while the oil is still in the ground.

Most gasoline will be pumped to an end user within a month or two of refinement. Therefore from the standpoint of day to day prices, it's the amount of gasoline that is currently available that is important.

Assume that the oil field prices fell due to new supply being discovered. This can happen quickly. What takes longer though are actual changes to the end user. The issue is that you can't just produce as much gasoline as you want immediately. Since prices are falling, it's to your advantage to sell as much as you can as soon as you can. But you can only increase current flow if you have slack capacity. If you don't, you need to add new capacity. This restricts how much additional flow can be added immediately by existing participants.

Over time, both existing and new participants can produce oil. If current participants have a cartel to keep supplies down and prices high, they can either increase their production to take advantage of current prices, keep production the same, or decrease production -- possibly so as to keep overall production (including new participants) the same. Cartel members may be reluctant to decrease production though. They are already facing less income due to lower prices. If they also decrease production, they may increase prices in the near term, but they still face lower prices as more new participants join.

Cartel members are engaged in monopolistic pricing. They are producing less than they could in order to maximize profit. Assuming the new participants do not join the cartel, they will price at competitive pricing. They'll produce up to the point where the cost to supply including their profit requirement reaches the demand price.

Note that the actual price will depend on what people do and how the supply is impacted. My point is that price changes won't necessarily be fully realized immediately. There's a difference between short run prices and long run prices and the uncertainty of what's actually happening in the long run. Prices can decrease over time due to a supply shock. They may not though. They could also be combined with a demand change. Or other supply changes. Or external events unrelated to oil that make people more or less risk averse.

I am suspicious of Moore's model. It's plausible but nowhere near definitive (and it aligns with his pro-fracking views, which makes it suspect in my eyes). I'm also suspicious of username_2's model. I'm concerned that it skips past short term effects to a long run result. Both models seem overly certain to me. Unfortunately, I have more questions than answers. username_5's link is interesting, but it leaves out demand and supply in the rest of the world.

The worst part is that any answer should be taken with a grain of salt. We don't know what the world would be like without fracking. All answers here are speculating. Gas prices might have fallen regardless. Or stayed the same. Or even increased.

> **Comments:**
> **username_5**: You´re right, those are some good points about petroleum liquidity. The only thing missing is financial speculation - algorithmic trading has played a certain amount of havoc with oil pricing in the past, but that tends to sort itself out over a few months - and it´s next to impossible to quantify.  
> **username_6**: You mention "Moore's model." What is this model that you're referring to?  
> **username_7**: @username_6  Model may be the wrong word.  Moore's assertion is that the use of fracking has shifted the supply curve such that prices have decreased.  I don't know that Moore has a formal model that can be examined.  

---

