New Record For Oil / Gas Split

Includes: UNG, USO
by: Mark J. Perry

A new record was set last week when the share of U.S. rigs drilling for natural gas fell to only 32%, which was the lowest percentage since Baker Hughes started keeping records of the oil/gas split in 1987 (see chart above). The previous record low share of rigs drilling for natural gas was 32.5% in September 1987. As natural gas prices keep falling to record lows at the same time that oil prices are rising, the industry has shifted drilling activities from gas to oil, bringing the share of rigs drilling for oil from below 20% as recently as May 2009 to a record high of 68% last week.

This shift from gas to oil drilling illustrates how the price system transmits valuable information about relative scarcity, and brings about an automatic reallocation of productive resources by suppliers in response to price changes. The power of the market, the invisible hand, and the profit motive in action....