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Deeper and Farther to Find the Natural Gas
Subject Increases in production costs
Topic Production and Costs
Key Words Production Cost, Price, Supply, Demand.
News Story

The price of natural gas has been rising over the last few years, and to prevent the price from increasing even more, firms are beginning to invest in significant new equipment that will allow them to drill deeper below the Gulf of Mexico (a prime source of domestic supply).

Firms are beginning what is known as "deep shelf play," implying that firms are going further into the Gulf of Mexico's continental shelf, for example, and deeper in to the ground. This presents its own share of problems, as the deeper the drills go, the hotter and pressure-filled the fields become. This makes the drilling process problematic and uncertain.

To search for the gas fields, firms must rely on faster computers. Fairfield Industries clustered together 1,200 computers to process five teraflops (5 trillion floating point operations per second) of data. Further, the drills are becoming more and more expensive. Rowan Cos. "Super Gorilla XL," cost $187 million, weighs 54 million pounds, and has an acre of deck space. It also has the capacity of drilling five miles below the ocean floor.


(Updated November, 2003)

Questions
1.

Are the costs these firms are incurring fixed or variable costs? What will be the impact on a firm's profit?

2. What impact will this new drilling have on a gas firm's long average and marginal cost curves? Why? Draw the curves to illustrate your answer.
3. 3. Does this new technology represent a movement along the supply curve for natural gas or a shift in supply for natural gas? Explain your answer.
Source "Firms Drill Deeper for Natural Gas," Russell Gold, The Wall Street Journal, 14 October 2003.

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