Horizontal and vertical transmissions in the US oil supply chain

Oil prices, inventory levels, and utilization rates are influenced by changes that are transmitted horizontally and/or vertically through the energy supply chain. We define horizontal transmissions as changes that are generated by linkages among fuels at a similar stage of processing while vertical transmissions are changes that are generated by upstream/downstream linkages in the oil supply chain. Here, we investigate vertical and horizontal transmissions by estimating vector error correction models (VECMs) that represent relationships among the price of crude oil, US refinery utilization rates, US stocks of crude oil, US stocks of motor gasoline, the US price of motor gasoline, and the US price of a substitute fuel, natural gas. Causal relationships estimated from both weekly and quarterly observations indicate that the price of crude oil is an important gateway for disturbances to the oil supply chain. Impulse response functions indicate that disturbances to crude oil prices ripple down the oil supply chain and affect inventory behaviors, refinery utilization rates, and the price of motor gasoline, and are transmitted laterally to the natural gas market.     

Market integration among electricity markets and their major fuel source markets

Dynamic price information flows among U.S. electricity wholesale spot prices and the prices of the major electricity generation fuel sources, natural gas, uranium, coal, and crude oil, are studied. Multivariate time series methods applied to weekly price data show that in contemporaneous time peak electricity prices move natural gas prices, which in turn influence crude oil. In the long run, price is discovered in the fuel sources market (except uranium), as these prices are weakly exogenous in a reduced rank regression representation of these energy prices.     

On dynamic linkages of the state natural gas markets in the USA: Evidence from an empirical spatio-temporal network quantile analysis

We empirically investigate the dynamic linkages of the state-level natural gas markets in the USA. By introducing a novel spatio-temporal network quantile econometric model, we can estimate the dynamic cross-state dependency or market integration of the state-level natural gas markets and the dependence of the state natural gas markets on the national crude oil market at different quantile levels. We find that significant local dynamic neighbouring market integrations exist in the natural gas markets not only in the eastern and central states as evidenced in the literature but also in some western and southwest states. Our results also show that there are significant linkages of the state-level natural gas markets to the national crude oil market through the lagged price shocks and the long-run price equilibrium with the national gas markets under varying price shock propagations. The results can help local government and energy users to mitigate the negative impacts from the expected or unexpected fluctuations in the oil and the neighbouring natural gas markets, which will enact appropriate state-level price discovery and energy policy and investment decision makings.     

Pricing the (European) option to switch between two energy sources: An application to crude oil and natural gas

We consider a firm, which can choose between crude oil and natural gas to run its business. The firm selects the energy source, which minimizes its energy or production costs at a given time horizon. Assuming the energy strategy to be established over a fixed time window, the energy choice decision will be made at a given future date T. In this light, the firm's energy cost can be considered as a long position in a risk-free bond by an amount of the terminal oil price, and a short position in a European put option to switch from oil to gas by an amount of the terminal oil price too. As a result, the option to switch from crude oil to natural gas allows for establishing a hedging strategy with respect to energy costs. Modeling stochastically the underlying asset of the European put, we propose a valuation formula of the option to switch and calibrate the pricing formula to empirical data on a daily basis. Hence, our innovative framework handles widely the hedge against the price increase of any given energy source versus the price of another competing energy source (i.e. minimizing energy costs). Moreover, we provide a price for the cost-reducing effect of the capability to switch from one energy source to another one (i.e. hedging energy price risk).     

Correlation between Chinese and international energy prices based on a HP filter and time difference analysis

To establish a reasonable system and mechanism for Chinese energy prices, we use the Granger causality test, Hodrick–Prescott (HP) filter and time difference analysis to research the pricing relationship between Chinese and international energy prices. We find that Chinese and international crude oil prices changed synchronously while Chinese refined oil prices follow the changes of international oil prices with the time difference being about 1 month to 2 months. Further, Australian coal prices Granger causes Chinese coal prices, and there is a high correlation between them. The U.S. electricity price is influenced by the WTI crude oil price, the U.S. gasoline price and the HenryHub gas price. Due to the unreasonable price-setting mechanism and regulation from the central government, China′s terminal market prices for both electricity and natural gas do not reflect the real supply–demand situation. This paper provides quantitative results on the correlation between Chinese and international energy prices to better predict the impact of international energy price fluctuations on China′s domestic energy supply and guide the design of more efficient energy pricing policies. Moreover, it provides references for developing countries to improve their energy market systems and trading, and to coordinate domestic and international energy markets.     

Price discovery in energy markets

In this study, we empirically analyze the price discovery process in the futures and spot markets for crude oil, heating oil and natural gas using daily closing prices. We use two different information share measures that are based on the methods proposed by Gonzalo and Granger (1995) and Lien and Shrestha (2014). Both measures indicate that almost all the price discovery takes place in the futures markets for the heating oil and natural gas. However, for the crude oil, the price discovery takes place both in the futures and spot markets. As a whole, our study indicates that futures markets play an important role in the price discovery process.     

Energy scarcity and economic growth reconsidered

The analysis in this paper is concerned with the effect of energy scarcity on economic growth in the United States. After defining the notion of scarcity and introducing two measures of scarcity, unit costs and relative energy price, changes in the trend in resource scarcity for natural gas, bituminous coal, anthracite coal, and crude oil over the most recent three decades are investigated. Each of the energy resources became significantly more scarce resources during the decade of the 1970s in the Malthusian Stock Scarcity and Malthusian Flow Scarcity sense. Unit costs exhibit a similar change for natural gas and crude oil but not for bituminous coal and anthracite coal. The situation reversed itself during the 1980s. Natural gas, bituminous coal, anthracite coal, and crude oil all became significantly less scarce resources during the decade of the 1980s than they had been during the 1970s. That is, the increase in scarcity as measured by relative energy prices observed during the decade of the 1970s was not reversed completely during the 1980s for natural gas and crude oil. Unit costs for natural gas and crude oil demonstrate analogous patterns and test results. Given that change has taken place, it has implications for future economic growth to the extent resource scarcity and economic growth are interrelated. To see whether this is a relevant concern, subsequent to the examination of changing resource scarcity trends, an objective effort is made to identify a long-run equilibrium relationship between energy scarcity and economic growth. Relying on co-integration techniques, only for crude oil is there a suggestion that resource scarcity has affected economic growth in the United States over the period 1889–1992.     

基于谱分析的国内外能源价格周期关系研究

为了更好地应对经济全球化背景下的能源价格问题,基于谱分析方法对国内外典型市场的石油、煤炭、电力、天然气四种主要能源价格的周期互动关系进行了初步研究与探讨,考虑到我国天然气与电力市场的发展现状,借鉴发展相对成熟的美国市场进行分析。结果表明,煤炭、电力、天然气三种能源市场价格均滞后于国际原油价格波动,其中煤炭价格波动略滞后于石油,而根据美国市场经验,天然气和电力价格波动周期均滞后于煤炭和石油市场价格。     

High gas dependence for power generation in Thailand: The vulnerability analysis

Thailand uses 74% of its natural gas supply for power generation and 70% of its power comes from gas-based technology. High dependence on natural gas in power generation raises concerns about security of electricity supply that could affect competitiveness of Thai manufacturing and other industries at the global level. The effect of fuel dependence on security of electricity supply has received less emphasis in the literature. Given this gap, this research examines the economic impact of high dependence on natural gas for power generation in Thailand by analyzing the effect of changes in fuel prices (including fuel oil and natural gas) on electricity tariff in Thailand. At the same time, the research quantifies the vulnerability of the Thai economy due to high gas dependence in power generation. Our research shows that for every 10% change in natural gas price, electricity tariff in Thailand would change by 3.5%. In addition, we found that the gas bill for power generation consumed between 1.94% and 3.05% of gross domestic product (GDP) between 2000 and 2004 and in terms of GDP share per unit of energy, gas dependence in power generation is almost similar to that of crude oil import dependence. We also found that the basic metal industry, being an electricity intensive industry, is the most affected industry. Additionally, we find that volatility of gas price is the main factor behind the vulnerability concern. The research accordingly simulates two mitigation options of the problem, namely reducing gas dependence and increasing efficiency of gas-fired power plants, where the results show that these methods can reduce the vulnerability of the country from high gas dependence in power generation.     

How does the U.S. natural gas market react to demand and supply shocks in the crude oil market?

In this paper we use monthly data (over the period from January 1976 to December 2012) and a structural VAR model to disentangle demand and supply shocks in the global crude oil market and investigate their effects on the real price of natural gas in the United States. We identify the model by assuming that innovations to the real price of crude oil are predetermined with respect to the natural gas market and show that close to 45% of the variation in the real price of natural gas can be attributed to structural supply and demand shocks in the global crude oil market.     

The roles of inter-fuel substitution and inter-market contagion in driving energy prices: Evidences from China’s coal market

Coal has been dominating energy supply and consumption in China, with the country becoming the largest energy supplier and consumer worldwide. Due to inter-fuel substitution of crude oil and inter-market contagion of international coal market, China's coal price might be interrelated with crude oil price and international coal price. However, the precise roles of these two effects in determining China's coal price are unknown. This paper contributes to previous literature by investigating this issue. We find that co-movements between China's coal price and crude oil price largely hinge on the shares of oil and coal in China’s energy mix, while its co-movements with international coal price depend on scales of coal trade. Inter-fuel substitution dominated the interaction of China's coal market with other energy types, but the importance of inter-market contagion has been increasing. We also find that China might have become an originator for driving the returns of crude oil and international coal, in particular after 2008. Furthermore, China's coal market is still a net volatility recipient for shocks from both crude oil market and international coal market. Given the increased integration of global energy markets, we anticipate this paper to provide a better understanding on the dynamic changes in China's coal prices.     

The economic viability of gas-to-liquids technology and the crude oil–natural gas price relationship

This paper explores the viability of a gas-to-liquids (GTL) technology and examines how GTL penetration could shape the evolution of the crude oil–natural gas price ratio. Much research has established the cointegrated relationship between crude oil and natural gas prices in the U.S. The persistently low U.S. natural gas prices in recent years seem to mark a shift in this relationship, and have led some in industry to begin considering investments in GTL capacity in the US. In order to look forward over decades when the underlying economic drivers may be outside of historical experience, we use a computable general equilibrium model of the global economy to evaluate the economic viability of GTL and its impact on the evolution of the crude oil–natural gas price ratio. Our results are negative for the potential role of GTL. In order to produce any meaningful penetration of GTL, we find it necessary to evaluate scenarios that seem extreme. With any carbon cap GTL is not viable. Moreover, even without a carbon cap of any kind, extremely optimistic assumptions about (i) the cost and efficiency of GTL technology and about (ii) the available resource base of natural gas and the cost of extraction, before the technology penetrates and it impacts the evolution of the crude oil–natural gas price ratio.     

The production of crude oil and natural gas

This paper is directed at examining the impact of changing prices on the level of production of crude oil and natural gas in the United States. By using a cross-correlation test for unidirectional causality it is clearly demonstrated that, for both crude oil and natural gas, domestic production is affected by changing prices. The implications are clear. The decontrol of the price of crude oil and the deregulation of natural gas prices will lead to additional production in the near term.     

An effective and robust decomposition-ensemble energy price forecasting paradigm with local linear prediction

Energy price time series exhibit nonlinear and nonstationary features, which make accurate forecasting energy prices challenging. In this paper, we propose a novel decomposition-ensemble forecasting paradigm based on ensemble empirical mode decomposition (EEMD) and local linear prediction (LLP). The EEMD is used to decompose energy price time series into components, including several intrinsic mode functions and one residual with a simplified structure. Motivated by the findings of the fully local characteristics of a time series decomposed by the EEMD, we adopt the LLP technique to forecast each component. The forecasting results of all the components are aggregated as a final forecast. For validation, three types of energy price time series, crude oil, electricity and natural gas prices, are studied. The experimental results indicate that the proposed model achieves an improvement in terms of both level forecasting and direction forecasting. The performance of the proposed model is also validated through comparison with several energy price forecasting approaches from the literature. In addition, the robustness and the effects of the parameter settings of LLP are investigated. We conclude the proposed model is easy to implement and efficient for energy price forecasting.     

Economic impact of oil price shocks on the Turkish economy in the coming decades: A dynamic CGE analysis

As a small open economy, Turkey depends on both imported oil and natural gas, importing almost two-thirds of its primary energy demand. This paper analyzes the economic effects of oil price shocks for Turkey as a small, open oil- and gas-importing country. To analyze the potential long-term effects of oil price shocks on macroeconomic variables of interest, including GDP, consumer price inflation, indirect tax revenues, trade balance, and carbon emissions, we developed TurGEM-D, a dynamic multisectoral general equilibrium model for the Turkish economy. Using TurGEM-D, we analyzed the impact of oil price shocks under three distinct scenarios: reference, high and low oil prices. The simulation results show that these oil prices have very significant effects on macro indicators and carbon emissions in the Turkish economy.     

The impact of price variation on the production of crude oil and natural gas

This paper is directed at examining the impact of changing prices on the level of production of crude oil and natural gas in the United States. By using a cross correlation test for unidirectional causality, it is clearly demonstrated that for both crude oil and natural gas, domestic production is affected by changing prices. The implications are clear. The decontrol of the price of crude oil and the deregulation of natural gas prices will lead to additional production in the near term.     

Linking the gas and oil markets with the stock market: Investigating the U.S. relationship

Energy markets can represent a strategic advantage when they are supporting each other, and specifically when energy segments are complementary enough to support economic development and growth. In this light, a high and strategic interest relies on the possible interactions between energy market segments as well as their impact on a given country’s financial market. The proposed research focuses on the interaction between the U.S. natural gas and U.S. crude oil markets on one side and their dependencies with the U.S. stock market on the other side. After controlling for structural changes or breaks, we characterize previous dependencies with the multivariate copula methodology. First, we assess the joint link prevailing between the natural gas and crude oil markets. Then, we characterize the joint risk structure prevailing between previous energy markets and the U.S. stock market. Finally, we assess the joint dependence structure between the natural gas, crude oil and stock markets.     

Forward curves,scarcity and price volatility in oil and natural gas markets

The role of inventory in explaining the shape of the forward curve and spot price volatility in commodity markets is central in the theory of storage developed by Kaldor [Kaldor, N. (1939) "Speculation and Economic Stability", The Review of Economic Studies 7, 1–27] and Working [Working, H. (1949) “The theory of the price of storage”, American Economic Review, 39, 1254–1262] and has since been documented in a vast body of financial literature, including the reference paper by Fama and French [Fama, E.F. and K.R. French (1987) “Commodity futures prices: some evidence on forecast power, premiums and the theory of storage”, Journal of Business 60, 55–73] on metals. The goal of this paper is twofold: i) validate in the case of oil and natural gas the use of the slope of the forward curve as a proxy for inventory (the slope being defined in a way that filters out seasonality); ii) analyze directly for these two major commodities the relationship between inventory and price volatility. In agreement with the theory of storage, we find that: i) the negative correlation between price volatility and inventory is globally significant for crude oil; ii) this negative correlation prevails only during those periods of scarcity when the inventory is below the historical average and increases importantly during the winter periods for natural gas. Our results are illustrated by the analysis of a 15 year-database of US oil and natural gas prices and inventory.     

Oil price risk evaluation using a novel hybrid model based on time-varying long memory

The volatility of crude oil price has a great influence on the world economy. In order to measure the crude oil price risk (VaR) and explain the dynamic relationship between investment income and risk in the oil market more clearly, this paper uses a variety of fractional GARCH models to describe typical volatility characteristics like long memory, volatility clustering, asymmetry and thick tail. The autoregressive conditional heteroscedasticity in the mean model (ARCH-M) and peaks-over-threshold model of extreme value theory (EVT-POT) are taken into account to develop a hybrid time-varying long memory GARCH-M-EVT model for calculation of static and dynamic VaR. Empirical results show that the WTI crude oil has a significantly long memory feature. All the fractional integration GARCH models can describe the long memory appropriately and the FIAPARCH model is the best in regression and out of sample one-step-ahead VaR forecasting. Back-testing results show that the FIAPARCH-M-EVT model is superior to other GARCH-type models which only consider oil price fluctuation characteristics partially and traditional methods including Variance-Covariance and Monte Carlo in price risk measurement. Our conclusions confirm that considering long memory, asymmetry and fat tails in the behavior of energy commodity return combined with effectively dynamic time-varying risk reflection such as the ARCH-M model and reliable tail extreme filter processes such as EVT can improve the accuracy of crude oil price risk measurement, provide an effective tool for analyzing the extreme risk of the tail of the oil market and facilitate the risk management for oil market investors.     

What explain the short-term dynamics of the prices of CO2 emissions?

Using a Bayesian Structural VAR (BSVAR), this paper analyzes the short-term dynamics of the prices of CO₂ emissions in response to changes in the prices of oil, coal, natural gas and electricity. The results show that: (i) a positive shock to the crude oil prices has an initial positive effect on the CO₂ allowance prices, which later becomes negative; (ii) an unexpected increase in the natural gas prices reduces the price of CO₂ emissions; (iii) a positive shock to the prices of the fuel of choice, coal, has virtually no significant impact on the CO₂ prices; (iv) there is a clear positive effect of the coal prices on the CO₂ allowance prices when the electricity prices are excluded from the BSVAR system; and (v) a positive shock to the electricity prices has a negative impact on the price of the CO₂ allowances. We also find that the energy price shocks have a persistent impact on the CO₂ allowance prices, with the largest effect occurring 6 months after a shock strikes. The effect is particularly strong in the case of the shocks to the natural gas and crude oil prices. Finally, the empirical findings suggest an important degree of substitution between the three primary sources of energy (i.e., crude oil, natural gas and coal), particularly when electricity prices are excluded from the BSVAR system.