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Have oil and gas prices got separated?

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  • Erdős, Péter

Abstract

This paper applies vector error correction models that show that oil and natural gas prices decoupled around 2009. Before 2009, US and UK gas prices had a long-term equilibrium with crude prices to which gas prices always reverted after exogenous shocks. Both US and UK gas prices adjusted to the crude oil price individually, and departure from the equilibrium gas price on one continent resulted in a similar departure on the other. After an exogenous shock, the adjustment between US and UK gas prices took approximately 20 weeks on average, and the convergence was mediated mainly by crude oil with a necessary condition that arbitrage across the Atlantic was possible. After 2009, however, the UK gas price has remained integrated with oil price, but the US gas price decoupled from crude oil price and the European gas price, as the Atlantic arbitrage has halted. The oversupply from shale gas production has not been mitigated by North American export, as there has been no liquefying and export capacity.

Suggested Citation

  • Erdős, Péter, 2012. "Have oil and gas prices got separated?," Energy Policy, Elsevier, vol. 49(C), pages 707-718.
    • Handle: RePEc:eee:enepol:v:49:y:2012:i:c:p:707-718
    DOI: 10.1016/j.enpol.2012.07.022
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