IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v64y2017icp511-519.html
   My bibliography  Save this article

The long-run oil–natural gas price relationship and the shale gas revolution

Author

Listed:
  • Caporin, Massimiliano
  • Fontini, Fulvio

Abstract

The gas extraction technological developments of the 2000s have allowed shale gas production, which in the US has become a significant part of the total gas production. Such a significant change might have affected the long-run relationship between oil and natural gas prices postulated by several authors. By using monthly data of oil and gas prices, as well as gas quantities from 1997 to 2013, we test for the presence of a long-run relationship, allowing also for possible breaks. We first show the stationarity of gas quantity data before the production of shale gas and the existence of a break in the trend (and in the intercept) on the integrated gas price time series, by the time shale gas enters the market. Then, applying a Vector Error Correction Model, we show that shale gas production has affected the relationship across variables. Gas quantities become relevant in the formation of gas prices after the beginning of shale gas production, while impact of oil prices on the gas ones doubles. However, on the basis of the available data, it is not unequivocally possible to assess whether or not a new long-run relationship between oil and gas has been established.

Suggested Citation

  • Caporin, Massimiliano & Fontini, Fulvio, 2017. "The long-run oil–natural gas price relationship and the shale gas revolution," Energy Economics, Elsevier, vol. 64(C), pages 511-519.
  • Handle: RePEc:eee:eneeco:v:64:y:2017:i:c:p:511-519
    DOI: 10.1016/j.eneco.2016.07.024
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988316301967
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.eneco.2016.07.024?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stephen P. A. Brown & Mine K. Yucel, 2008. "What Drives Natural Gas Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 45-60.
    2. Peter R. Hartley & Kenneth B Medlock III & Jennifer E. Rosthal, 2008. "The Relationship of Natural Gas to Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 47-66.
    3. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
    4. Salman Saif Ghouri, 2006. "Forecasting natural gas prices using cointegration technique," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 30(4), pages 249-269, December.
    5. Halova Wolfe, Marketa & Rosenman, Robert, 2014. "Bidirectional causality in oil and gas markets," Energy Economics, Elsevier, vol. 42(C), pages 325-331.
    6. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
    7. Brigida, Matthew, 2014. "The switching relationship between natural gas and crude oil prices," Energy Economics, Elsevier, vol. 43(C), pages 48-55.
    8. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    9. Hansen, Peter Reinhard, 2003. "Structural changes in the cointegrated vector autoregressive model," Journal of Econometrics, Elsevier, vol. 114(2), pages 261-295, June.
    10. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
    11. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-560, August.
    12. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    13. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    14. Frank Asche & Petter Osmundsen & Maria Sandsmark, 2006. "The UK Market for Natural Gas, Oil and Electricity: Are the Prices Decoupled?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 27-40.
    15. Wakamatsu, Hiroki & Aruga, Kentaka, 2013. "The impact of the shale gas revolution on the U.S. and Japanese natural gas markets," Energy Policy, Elsevier, vol. 62(C), pages 1002-1009.
    16. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    17. Péter Erdős & Mihály Ormos, 2012. "Natural Gas Prices on Three Continents," Energies, MDPI, vol. 5(10), pages 1-17, October.
    18. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Atle Oglend & Morten E. Lindback & Petter Osmundsen, 2016. "Shale Gas Boom Affecting the Relationship Between LPG and Oil Prices," The Energy Journal, , vol. 37(1), pages 211-232, January.
    2. Rodríguez-Caballero, Carlos Vladimir & Ventosa-Santaulària, Daniel, 2017. "Energy-growth long-term relationship under structural breaks. Evidence from Canada, 17 Latin American economies and the USA," Energy Economics, Elsevier, vol. 61(C), pages 121-134.
    3. Moutinho, Victor & Bento, João Paulo Cerdeira & Hajko, Vladimír, 2017. "Price relationships between crude oil and transport fuels in the European Union before and after the 2008 financial crisis," Utilities Policy, Elsevier, vol. 45(C), pages 76-83.
    4. Eiji Kurozumi & Yoichi Arai, 2007. "Efficient estimation and inference in cointegrating regressions with structural change," Journal of Time Series Analysis, Wiley Blackwell, vol. 28(4), pages 545-575, July.
    5. Haug Alfred A & Beyer Andreas & Dewald William, 2011. "Structural Breaks and the Fisher Effect," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-31, May.
    6. Tillmann, Peter, 2003. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Bonn Econ Discussion Papers 27/2003, University of Bonn, Bonn Graduate School of Economics (BGSE).
    7. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2009. "How Stable Are Monetary Models of the Dollar-Euro Exchange Rate?: A Time-Varying Coefficient Approach," Discussion Papers of DIW Berlin 944, DIW Berlin, German Institute for Economic Research.
    8. Lindback, Morten & Osmundsen, Petter & Øglend, Atle, 2013. "Shale Gas and the Relationship between U.S. Natural Gas, Liquified Petroleum Gases and Oil Market," UiS Working Papers in Economics and Finance 2013/5, University of Stavanger.
    9. Caporin, Massimiliano & Fontini, Fulvio & Talebbeydokhti, Elham, 2019. "Testing persistence of WTI and Brent long-run relationship after the shale oil supply shock," Energy Economics, Elsevier, vol. 79(C), pages 21-31.
    10. Tarlok Singh, 2017. "Are Current Account Deficits in the OECD Countries Sustainable? Robust Evidence from Time-Series Estimators," The International Trade Journal, Taylor & Francis Journals, vol. 31(1), pages 29-64, January.
    11. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2011. "The dollar-euro exchange rate and macroeconomic fundamentals: a time-varying coefficient approach," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(1), pages 11-40, April.
    12. Carsten Trenkler*, 2005. "The Effects of Ignoring Level Shifts on Systems Cointegration Tests," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 89(3), pages 281-301, August.
    13. repec:zbw:rwirep:0134 is not listed on IDEAS
    14. Nakashima, Kiyotaka & Saito, Makoto, 2012. "On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 454-471.
    15. Salah A. Nusair & Naser I. Abumustafa, 2012. "Recursive Cointegration Analysis of Purchasing Power Parity: An Application to Asian Countries," The American Economist, Sage Publications, vol. 57(2), pages 196-209, November.
    16. Joscha Beckmann & Ansgar Belke & Michael Kühl, 2009. "How Stable Are Monetary Models of the Dollar-Euro Exchange Rate? - A Time-varying Coefficient Approach," Ruhr Economic Papers 0134, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    17. repec:cii:cepiei:2012-q3-131-4 is not listed on IDEAS
    18. Juan Carlos Cuestas & Luis A. Gil-Alana & Laura Sauci, 2020. "Public finances in the EU-27: Are they sustainable?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 181-204, February.
    19. Salah A. Nusair & Khalid M. Kisswani, 2015. "Asian Real Exchange Rates And Oil Prices: A Cointegration Analysis Under Structural Breaks," Bulletin of Economic Research, Wiley Blackwell, vol. 67(S1), pages 1-25, December.
    20. Salah A. Nusair, 2008. "Purchasing Power Parity under Regime Shifts: An Application to Asian Countries," Asian Economic Journal, East Asian Economic Association, vol. 22(3), pages 241-266, September.
    21. Mohsen Fardmanesh & Seymour Douglas, 2008. "Foreign Exchange Controls and the Parallel Market Premium," Review of Development Economics, Wiley Blackwell, vol. 12(1), pages 72-89, February.
    22. Zurbruegg, R. & Allsopp, L., 2004. "Purchasing power parity and the impact of the East Asian currency crisis," Journal of Asian Economics, Elsevier, vol. 15(4), pages 739-758, August.

    More about this item

    Keywords

    Shale gas; Natural gas; Crude oil; Cointegration; Vector Error Correction Models;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:64:y:2017:i:c:p:511-519. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.