On the relationship between U.S. crude oil and natural gas for economic resilience prospects

As a fossil-fuel dependent economy, the United States of America relies heavily on crude oil and natural gas. Fluctuations in crude oil and natural gas prices can have a profound impact on the U.S. economy and society. Such a vulnerability to energy commodities threatens the resilience of the U.S. economy, and therefore, U.S. economic development and growth. To be able to ensure energy security and affordable energy sources, the (joint) dynamics of energy commodity prices should be captured. This article examines the complex dynamic relationship between U.S. crude oil and natural gas prices, as strategic energy sources. While crude oil prices lead natural gas prices, the relationship exhibits regime shifts that depend on technological, economic, and geopolitical factors. In each regime, we model the relationship between crude oil and natural gas price changes by using a linear Kalman filter with stochastic regression coefficients and heteroskedastic errors in the measurement equation. The random parameters and volatility illustrate the uncertainty in energy costs and prices and handle local nonlinearity. Crude oil and natural gas prices decouple for two regimes of about four and five years (i.e., short-term decoupling), while they couple for four subsequent regimes (i.e., long-term coupling for about seventeen years). The results unveil changes in the competition between oil price makers and takers and the impact of technological improvements, including the shale gas revolution and renewable energy. They also provide insights into possible short- and/or long-term hedging strategies between crude oil and natural gas, both at the producer and the end-user level. In this context, the findings are useful for the interplay between the U.S. economy, and both crude oil and natural gas. They provide an opportunity for policymakers to act and strengthen the economic resilience by sustaining energy supply and security, and mitigating energy price risk.