Effect of price expectations on drilling activity

The decision to drill depends partly on expectations about the future path of prices which are formed through historical experience. The estimates indicate that as long as nominal crude oil prices remain at the official price of $29 per barrel for Saudi light, there will be a slight but steady decline in the average level of the drilling rig count. A theoretical model to test this confirms that continued downward pressure on oil prices, caused by the glut in the world oil market, is expected to keep prices from rising in 1985. The results suggest that steady or falling oil prices can decrease the rig count through the expectations factor. Two appendices describe the theoretical model and test the results with a proxy variable. 17 references, 4 figures.