Technological improvements have proven a key driver of America’s serious growth in oil production over the past five years. Advances in everything from drilling technology to well performance analytics have opened up once uneconomic oil fields to American drillers. Oil prices might have rebounded slightly over the past two weeks, but they are still below 50% of what they were a year ago.
Much Fed chatter has questioned the effect oil prices might have on inflation. However, I also wonder if it is possible to isolate the oil industry as an example of deflation caused via technical change. I am not entirely sure of the best way to think of oil as a good. Its true supply is fixed, yet its effective supply is determined by the oil price and drilling costs. Recent technical change has perhaps effectively increased the supply through increasing the productivity of capital and labor. It would be interesting to look within the oil industry to see if technical change has improved the productivity of one sectoral input more than another.