In response to natural gas prices falling to inflation-adjusted multi-decade low levels over the last several years, along with high oil prices, there has been an ongoing switch in drilling activity from natural gas to oil, as can be seen in the chart above of rig shares. Now a new milestone has been reached. For the first time since Baker-Hughes started tracking the rig split between oil and gas in 1987, the share of active rigs drilling for natural gas fell below 30% last week and the oil share rose to a new record high of 70%.
Economic Lesson(s): Prices transmit information about relative scarcity. Incentive matter. Producers respond to prices and incentives. Through the invisible hand of the market and the motivation of profit-maximization, producers are naturally switching production from relatively abundant natural gas to relatively scarce crude oil. It's a good example of market forces at work, re-allocating resources through "spontaneous order," without any need for central planning.
Economic Lesson(s): Prices transmit information about relative scarcity. Incentive matter. Producers respond to prices and incentives. Through the invisible hand of the market and the motivation of profit-maximization, producers are naturally switching production from relatively abundant natural gas to relatively scarce crude oil. It's a good example of market forces at work, re-allocating resources through "spontaneous order," without any need for central planning.
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