Journal of Political Economy

Summary:

  • In existing wells, the capacity of the well and underground pressure that pushes oil through the rock, to the wellbore and up to the surface creates a maximum flow rate that smoothly declines over time as the pressure eases. As a result, existing wells do not increase or decrease production in response to prices.
  • Oil extractors can drill new wells in response to prices, eventually leading to increased oil production. Drilling new wells takes both money and time, creating a lag of a few months before oil can come on stream.
  • Large changes in oil demand have an immediate impact on oil prices and drilling activity, and eventually on production from new wells.