Investment, Productivity, and Selection in the U.S. Shale Boom

About this event

Why was the U.S. shale oil and gas revolution so revolutionary? As the U.S. Energy Information Administration quipped in 2024, “the U.S. produces more crude oil than any country, ever”. The current, record, rate of production has been achieved though increases in the industry’s oil and gas production per well, which have out-weighed a decrease in the drilling of new wells since the onset of the boom in 2010. This project asks how, why, and when the industry achieved these gains. Our primary focus, at least for now, is on decomposing the evolution of output per well into changes due to drilling site selection versus changes due to firms’ adoption of improved technologies or fracking inputs. Site selection could be positive (better geologic locations are drilled first), negative (firms learn over time which locations are best), or some of both. We evaluate these possibilities by developing and estimating a joint model of oil production and drilling decisions. While the model is tailored to the shale oil and gas setting, its core ideas are applicable to other settings in which the productive outcome of an investment is a function of both the investment’s location and the investing firm’s skill in executing the project, conditional on location. The model uses local variation in land leasing difficulty as identifying variation that shifts the timing of firms’ first well drilled in each location. And it accounts for firms’ ability to learn from previously drilled wells’ production realizations before deciding whether to drill additional wells in the same location. Using data from the Bakken Shale in North Dakota, we find evidence of positive selection early in the boom and negative selection later, but these effects are swamped by a large increase (~0.5 log points) in output per well that is driven by changes in firms’ inputs and application of technology, conditional on location. Most of this increase occurred shortly after the sharp fall in oil prices and drilling activity in late 2014, consistent with “slack time” theories of innovation.