Three Essays on Energy Economics
Date
2018-06-25
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Abstract
This dissertation investigates the effect of a technology innovation, hydraulic fracturing, on the North American energy market and social welfare from both theoretical and empirical perspectives. Chapter 1 provides a theoretical framework to explain why the optimal path of oil and gas production by hydraulic fracturing can be different from conventional production. I argued that hydraulic fracturing has substantially reduced production uncertainty since the shale boom. I model production uncertainty as a random shock that continuously shifts realized productions from proved reserves. With this new feature incorporated into a standard extraction model, I conclude that the reduced production uncertainty caused by hydraulic fracturing affects the optimal path of expected production through two channels. First, the expected production is tilted from the future towards the present as producers become less patient. Second, it limits the increases in marginal costs in response to production shocks. Both of these two channels would accelerate expected extractions and hence proved reserves would deplete more rapidly by hydraulic fracturing. Chapter 2 examines the impact of the recent boom in U.S. oil production, caused by hydraulic fracturing, on the downstream U.S. petroleum refining industry. By using a panel dataset of 16 U.S. independent refinery firms from 2005 to 2015, the empirical evidence suggests that the shale boom caused by hydraulic fracturing was associated with an increased refinery profitability in U.S. Gulf Coast region, but leaving few benefits for U.S. gasoline and diesel consumers. Chapter 3 explores the effect of shale boom on three important measures of the natural gas market: the rig count of active drilling rigs, production, and storage. By using a large panel dataset including 48 U.S. states and 10 Canadian provinces, I demonstrate that the expansion of hydraulic fracturing has resulted in a significant change in the natural gas spot and storage markets. In the spot market, production from existing wells has become more elastic to spot prices with the expansion of hydraulic fracturing. Moreover, with drilling also being more elastic to future prices and more productive with the expansion of hydraulic fracturing, the production from newly established wells has become more elastic to price. Simultaneously, in the storage market, I document adjusting natural gas storage has become more flexible with the expansion of hydraulic fracturing. Since storage is primarily used to meet the demand shocks from temperature variations, hydraulic fracturing has significantly decreased the impact of temperature shocks. As a result, consumers can benefit from shale boom by avoiding paying abruptly raised prices for natural gas in the short run.
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Keywords
Hydraulic Fracturing, Natural Gas Market, Shale Boom, Crude Oil Market
Citation
Zheng, X. (2018). Three essays on energy economics (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/32230