Oil extraction and crude oil price behavior in the United States: a fractional integration and cointegration analysis

ABSTRACT

This study reviews the relationship between the different types of oil extraction such as horizontal drilling or fracking, or directional drilling, which is a hybrid between vertical and horizontal, on the behavior of West Texas Intermediate crude oil prices. In doing so the study adds a new dimension to the literature on the relationship between oil price and extraction techniques. The analysis is based on statistical properties using the VAR model of Fractional Cointegration, reflecting evidence of cointegration between the series, and indicating a long-term equilibrium relationship. In addition, we apply the wavelet transform to analyze the structural changes in the price of West Texas Intermediate brought about by changes in drilling technology. Our results show that all three forms of extraction and West Texas Intermediate prices reach high levels of correlation, particularly around 2014. We conclude that a decrease in production based on any form of crude oil extraction leads to an increase in the price of crude oil.

KEYWORDS:

• Drilling trajectory
• crude oil production
• crude oil prices
• fractional integration
• FCVAR model
• wavelet analysis

Acknowledgement

Comments from the Editor and four anonymous reviewers are gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ http://rigcount.bakerhughes.com.

² https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=W.

³ Continuous Wavelet Transform (CWT) has been applied in several finance and economics research papers such as Vacha and Barunik (2012), Aguiar-Conraria and Soares (2011, 2014), Dewandaru, Masih, and Masih (2016), Tiwari, Mutascu, and Albulescu (2016), Jammazi et al. (2017), among others.

⁴ https://sites.google.com/site/aguiarconraria/joanasoares-wavelets.

⁵ See Diebold and Rudebusch (1991), Hassler and Wolters (1994) and Lee and Schmidt (1996).

⁶ A note of caution should be adopted here since the AIC and BIC may not necessarily be the best criteria for applications involving fractional models (Hosking 1981).