The tight oil and gas exploration industry may be making investment decisions based on futures contracts instead of the more volatile day-to-day prices, suggests a paper published online this week in Nature Energy. These findings may explain why a volatile oil market failed to stop US oil and gas resurgence in 2000s.

Tight oil and gas exploration involves horizontal drilling in tight geological, or “shale”, formations. Although US shale production continues to attract investments, analysts have questioned the profitability of hydraulic drilling at oil prices below US $60 per barrel. An accurate break-even price for tight oil and gas has been difficult to estimate because of the lack of available cost data.

Esmail Ansari and Robert Kaufmann studied how changes in crude oil price, among other factors, affect the installation of new rigs in tight oil and gas formations. They found the break-even price to be around US $50 per barrel. However, the authors note that the effect of price volatility on decisions to rent rigs declines as prices move above or below this break-even price. They conclude that investors use futures contracts - which promise delivery on later dates at agreed prices - instead of day-to-day prices to plan exploration and development, and new rig productivity affects both drilling activity and oil prices.