The chart in this sidebar shows the real US exploration and production capital spending, measured by real private investments on the structures and equipment used in oil and gas extraction and supporting services, and real West Texas Intermediate prices, over the period 1960 to 2014.
According to the Johansen test, the two series have a cointegrating relation. This means that capital spending and WTI prices share a long-run equilibrium relation and move together with each other over time in the long run.
However, as shown by the shaded areas, capital spending tended to deviate upwards from the "equilibrium" relation when oil prices had been persistently high, e.g. early 1980s, 2005-08, and the last couple of years. These deviations are called "investment bubbles."
The correction period following the fall of oil price brings lots of pains as capital spending has to decline fast to squeeze the large deviations.
Conglin Xu | Managing Editor-Economics
Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor.
Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.
