Slide 8 of 20
Market prices can affect production paths, particularly in the short-run. Texas is a good example:
1. Texas has been producing oil for more than 100 years.
2. In the early 1980ís, Texas oil production had been declining by a couple of percent per year even with relatively high prices and drilling rates.
3. Production was actually increasing slightly at the end of 1985, but in 1986, oil prices fell 51 percent and oil production fell 13 percent.
4. Oil production increased 1 percent in Texas in 1997 at average prices and moderate drilling rates, but in 1998 prices plunged by 44 percent and Texas oil production fell 14 percent.
5. Clearly, market prices have a short-term effect on production rates.