Technological Change, Depletion and the U.S. Petroleum Industry***

Technological Change, Depletion and the U.S. Petroleum Industry*** A common claim in the nonrenewable resource literature is that improvements in technology may largely offset the effects of increasing scarcity over time. This study provides perhaps the first empirical evidence on this issue by analyzing the determinants of the average finding cost for additional petroleum in the U.S. over the 1967-90 period. A new index of the level of technology is developed. Using this index and taking other determinants into account, average cost functions for natural gas and crude oil reserve additions, respectively, are estimated. These functions enable us to isolate the separate effects of depletion and technological improvement in each segment of the industry. We also carry out counter-factual simulations for average finding costs in a scenario with $no technological improvement.# The analysis suggests that technological change played a major role in allaying what would otherwise have been a sharp rise in the average cost of finding additional reserves of natural gas. The impact of technological change on finding costs for U.S. crude oil reserves has been more modest. JEL Classification: D24 Production; Capital and Total Factor Productivity Q31 Nonrenewable Resources and Conservation: Supply and Demand L71 Industry Studies: Primary Products (Mining, Extraction, and Refining: Hydrocarbon Fuels) key words: technological change, productivity growth, cost functions, cointegration, error correction model, quality ladders model, varieties model, nonrenewable resource depletion.