Heterogeneous Oil Supply Elasticities: Indebtedness and Production Responses to the COVID-19 Shock

Debt matters for oil supply elasticities. We document the resiliency of oil production to the COVID-19-related collapse in demand due to indebtedness. We use exogenous variation in the timing of debt-related payments to identify financially constrained operators. We show that more financially constrained firms cut production by less than less-constrained firms and were less likely to complete new wells. To explore the mechanisms, we use borrowing-limit cuts and credit-line drawdowns to measure access to credit, and we exploit failed hedging practices. The propagation of oil demand shocks crucially depends on the indebtedness of the oil sector. (JEL G32, D22, Q41)