Crude oil prices and rig counts

Each week Baker Hughes releases a count of the number of active drilling rigs in the international oil and gas industry. Their data has been available for over sixty years and is regarded as a barometer for the oil services industry in particular as a lead indicator of demand for the capital equipment used in drilling, producing and processing hydrocarbons.

Why look at rig counts?

Partly because the number of active rigs might reflect a market-driven response to changes in oil and gas prices and also expectations of future price movements. When crude oil carries a high price in world markets, the profitability of drilling for oil from known reservoirs ought to improve and we might expect to see an expansion in the number of active rigs.

That said there are many factors that affect how many rigs are in operation – it is not simply a question of rigs changing in response to market demand for oil.

Technological change affects the number or rigs needed to develop a reservoir and also allows new known reserves to be exploited – for example the deepwater areas off the west coast of Africa.

Climatic conditions can affect the logistics of drilling schedules including the ability of oil producers to move rigs and establish new drilling sites.

Some reservoirs are only available for exploitation on time-limited leases – and as these leases come to an end, so more rigs might be brought into use.

Our chart shows that in recent years there has been a substantial rise in the world total of active oil rigs – indeed since 2002 the number has grown from around 2,000 to over 3,500 with the number of US-based rigs more than doubling although this figure is still less than half of the peak at the end of 1981.

I have added to the chart an index of global crude oil prices using the Goldman Sachs Commodity Index data series. To what extent do you think that the oil rig count reflects movements in global crude oil prices? Is the volume of active rigs a useful measure of the supply-side response to the recent boom in prices? And what impact might the sudden and dramatic fall in prices have on the number of rigs in operation as we head into 2009? The Times reports today that world crude oil demand will fall in 2009 for the first time since 1983.