Abstract
The rise of shale resources in the United States is changing the petrochemical industries. Ethylene, the first building block of petrochemical products, is becoming the first target to be hit by the shale boom, and its shifting price dynamics needs to be explored. This study analyzes the transition of ethylene prices from crude oil to natural gas (vertical price dynamics) and investigates widening gaps among regional ethylene prices (horizontal price dynamics). To do this, we detect structural changes in cointegrating relationships and derive time-varying cointegration equations. In addition, for the long- and short-run dynamics, this study established and estimated an error correction model (ECM), with controlling, time-varying cointegrations. This study develops econometric studies by applying time-varying cointegration to nonenergy uses of fossil fuels. Thereby, our results discover that the feedstock structure of US ethylene is moving from crude oil to natural gas and that the comovement of US and Japanese prices is getting intensified.
Highlights
The United States shale boom is widening the ethylene price gap between the US and other regions
This study aims to explore the effect of shale boom on 1) the changing vertical relationship between US ethylene price and crude oil/natural gas, and 2) the horizontal gap between regional prices in the US, Japan, and Northwest Europe
Its production method is divided into naphtha cracking center (NCC), using naphtha refined from crude oil; and ethane cracking center (ECC), using ethane extracted from natural gas
Summary
The United States shale boom is widening the ethylene price gap between the US and other regions. From 2015 to 2018, the average price in the US was 612 USD/mt; while it was over 1000 USD/mt in Northwest Europe and Japan This widening price difference is mainly due to the decline in natural gas and ethane prices, which are the feedstock of ethylene, with the advent of the shale era in the US. This study aims to explore the effect of shale boom on 1) the changing vertical relationship between US ethylene price and crude oil/natural gas, and 2) the horizontal gap between regional prices in the US, Japan, and Northwest Europe. In Asia and Europe, where the oil refining industry is developed, ethylene is mainly produced by the NCC method; while the ECC is adopted in North America and the Middle East, which have an abundance of natural gas. With the ECC, ethylene yield is about 80%, and ethane is used almost exclusively as a feedstock for ethylene [1]
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