West Texas Oil Drilling Is Booming — No Surprise
We just returned from four days of hiking in Big Bend National Park, and today we drove 500 miles in Texas along I-10. A number of oil wells were pumping vigorously along the highway. When we took the same road 6 years ago, the wells were there, but they were not pumping.
This is no surprise: in 2002 the price of crude oil was below $30 per barrel, and today it is over $100 per barrel. The 2002 price of $30 exceeded the marginal cost of pumping oil out of these wells, which probably are not among the most efficient. At today’s price, every barrel pumped yields a profit, so profit-maximizing rig owners have reactivated these old wells. This is a standard response in a competitive industry – as the product price rises, suppliers move up the short-run supply curve.