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Price Adjustments and Transaction Costs in the European Natural Gas Market

Author

Listed:
  • Rafael Garaffa
  • Alexandre Szklo
  • André F.P. Lucena
  • José Gustavo Féres

Abstract

The presence of long-term contracts indexed to oil prices is a key feature of the evolution of the European natural gas industry. During the 2000’s, the European Commission (EC) promoted reforms to establish a single and integrated natural gas market, leading to the development of short-term regional markets based on hubs. This paper tests the hypothesis that asymmetric price responses in the continental European hubs derive from transaction costs. By applying linear and nonlinear error correction models, it assesses the price transmission dynamics and the degree of integration between the German, the Belgium and the Dutch spot markets. The models identified cointegration relations, price asymmetries and transaction costs in these markets. Results show a high degree of integration across regions, with prices converging rapidly to their long-run equilibrium. However, asymmetric price adjustments reveal the presence of transaction costs in the German regional hub.

Suggested Citation

  • Rafael Garaffa & Alexandre Szklo & André F.P. Lucena & José Gustavo Féres, 2019. "Price Adjustments and Transaction Costs in the European Natural Gas Market," The Energy Journal, , vol. 40(1), pages 171-188, January.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:1:p:171-188
    DOI: 10.5547/01956574.40.1.rgar
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    References listed on IDEAS

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    Cited by:

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    2. Hupka, Yuri & Popova, Ivilina & Simkins, Betty & Lee, Thomas, 2023. "A review of the literature on LNG: Hubs development, market integration, and price discovery," Journal of Commodity Markets, Elsevier, vol. 31(C).
    3. Amina Baba & Sana Ben Kebaier & Anna Creti, 2024. "How efficient are natural gas markets in practice? A wavelet-based approach," Annals of Operations Research, Springer, vol. 334(1), pages 623-677, March.
    4. Szafranek, Karol & Papież, Monika & Rubaszek, Michał & Śmiech, Sławomir, 2023. "How immune is the connectedness of European natural gas markets to exceptional shocks?," Resources Policy, Elsevier, vol. 85(PA).
    5. Akcora, Begum & Kandemir Kocaaslan, Ozge, 2023. "Price bubbles in the European natural gas market between 2011 and 2020," Resources Policy, Elsevier, vol. 80(C).
    6. Papież, Monika & Rubaszek, Michał & Szafranek, Karol & Śmiech, Sławomir, 2022. "Are European natural gas markets connected? A time-varying spillovers analysis," Resources Policy, Elsevier, vol. 79(C).
    7. Henrique Vilela Pinto dos Anjos & Alexandre Szklo & Mauro Francisco Chávez Rodríguez, 2024. "Gas market integration in South America: The role of Argentine gas to reduce the regional exposure to liquefied natural gas imports," Energy & Environment, , vol. 35(7), pages 3530-3553, November.

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    More about this item

    Keywords

    Natural gas prices; Market integration; Threshold Vector Error Correction Model; Transaction costs;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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