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Fracking and the Elasticity of U.S. Oil Production

by Walls, W. D. and Zheng, Xiaoli

The revolution in U.S. oil production attributable to the application of hydraulic fracturing to oil shale formations has resulted in a substantive change in the supply elasticities of U.S. oil producers. We estimate the short-run and long-run price elasticities of U.S. oil production before and after the widespread adoption of hydraulic fracturing production techniques in shale oil formations. The estimates suggest that the boom in shale oil production is associated with a smaller magnitude short-run supply adjustment in response to price reductions; we also find a larger magnitude long-run supply adjustment in response to price recoveries. This suggests that the adoption of hydraulic fracturing technology has substantially dampened price adjustments in crude oil markets in a way that has expanded the supply of crude oil, making renewable fuels less competitive with petroleum-based fuels.

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