Marcellus Shale and structural breaks in oil and gas markets: The case of Pennsylvania

Abstract

This paper first documents the rapid increase in Pennsylvania's share of U.S. natural gas production from ongoing development of the Marcellus Shale formation. It does stand to reason that the Marcellus Shale boom has made Pennsylvania natural gas production far more influential on aggregate oil and gas markets than before, but does such a differential effect appear in the data? Can we say, unequivocally, that the Marcellus Shale boom caused Pennsylvania's natural gas output to move the needle on national natural gas prices more so than before the boom occurred? These questions are investigated utilizing a threshold VAR model based on Tsay's (1998) test for unknown break points to investigate how, if at all, Pennsylvania's rapidly growing share of national natural gas production has altered the linkages between Pennsylvania's natural gas production and overall oil and gas prices. Findings indicate a structural break in the impact of Pennsylvania's natural gas production on natural gas prices occurring in early 2009, a date that matches well with the onset of the state's rapid production growth. Pre-break, there is minimal evidence that changes in Pennsylvania's production had a significant effect on the aggregate U.S. natural gas market; but when post-break data is included, an increase in Pennsylvania's production leads to a lower average national price of natural gas, which is transitory and lasts for only a few months. These results provide statistical support to the notion that Pennsylvania has become a substantial component of the U.S. natural gas market at least in the short-run.