Essays on the U.S. oil and natural gas industry
Littlefield, Thomas Lucas
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This dissertation investigates various aspects of the U.S. offshore crude oil and natural gas production market. In the first essay, I investigate whether energy firms producing U.S. offshore oil and natural gas benefit from the volatility of crude oil prices. Lease rights to offshore oil and natural gas production in the U.S. are determined through auctions in which the leases, at least in part, do not respond to changes in the price of oil. The leasing process precludes the possibility of contracts perfectly extracting all rent at any point in time. My results however suggest that contracts, despite their lack of responsiveness to changes in the price of crude, have on average done a good job extracting rent over time. In the second essay, I investigate the profitability of a sample of international oil companies and find that real profits of these oil companies display unit root behavior. One theory, the persistence in profit hypothesis, presumes this finding to indicate the existence of market power. Using a simple model of supply and demand I show that this implication may not hold. I propose an alternative test to ascertain whether barriers to entry exist within the U.S. offshore oil and natural gas production industry. The test suggests that offshore oil and gas production is competitive, which is contrary to public and main stream media opinion. Most importantly, this study produces a viable alternative to the persistence in profits method. In the last essay, I conduct a natural experiment to determine the effect of the windfall profit tax (1980-1988) on the U.S. oil industry. I estimate marginal cost for a sample of international energy firms for both U.S. and foreign production. With these estimates I then conduct a difference in differences experiment to determine the effect of the windfall profit tax on several indicators of domestic investment and production. The results of this experiment suggest that the windfall profit tax had little effect in terms of relative importance.