Supply flexibility in the shale patch: Facts, no fiction

A recent controversy in the literature, between Baumeister and Hamilton (2019a,b) on the one side, and Kilian and Zhou (2019) and Kilian (2019) on the other side, has involved the paper by Bjørnland, Nordvik and Rohrer (2017). The debate relates to the size of the price elasticity of oil supply. In particular, Baumeister and Hamilton (2019a,b) argue for the use of a sizeable supply elasticity, supported, among others, by the findings in Bjørnland et al. (2017). Kilian and Zhou (2019) and Kilian (2019), on the other hand, dismiss the results of Bjørnland et al. (2017)., and suggest the short-run supply elasticity is closer to zero.

In this CAMP working paper 08/2019, Bjørnland now discusses the criticism put forward by Kilian and Zhou (2019) and Kilian (2019) with regard to the supply elasticity literature. In particular, she describes how these two papers mischaracterize the model and results found in Bjørnland et al. (2017), and in so doing, downplay the importance and implication of shale oil producer’s behavior.

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Source:

  • Baumeister, C. and J. D. Hamilton (2019a). Structural interpretation of vector autoregressions with incomplete identification: Revisiting the role of oil supply and demand shocks. American Economic Review 109 (5), 1873-1910.
  • Baumeister, C. and J. D. Hamilton (2019b). Structural interpretation of vector autoregressions with incomplete identification: Setting the record straight. Manuscript, UC San Diego.
  • Bjørnland, H. C., F. M. Nordvik, and M. Rohrer (2017). Supply flexibility in the shale patch: Evidence from North Dakota. CAMP Working Paper 2/2017 – Manuscript revised May 2019, BI Norwegian Business School.
  • Kilian, L. (2019). Facts and Fiction in Oil Market Modeling. Manuscript, September, Federal Reserve Bank of Dallas.
  • Kilian, L. and X. Zhou (2019). Oil supply shock redux? Manuscript, July, University of Michigan.

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