Abstract
Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil. This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.
Highlights
The U.S natural gas market has changed dramatically in recent years
In this paper we investigate the relationship between Liquefied petroleum gases (LPGs), oil and natural gas prices in the U.S Our main research question is whether the shale gas expansion, which has affected the oil/natural gas relationship, has affected the relationship between LPG and oil prices
The generalized model allows for structural changes in the adjustment matrix and cointegration vectors
Summary
The U.S natural gas market has changed dramatically in recent years. The shale gas boom has increased domestic natural gas production to the degree that only minimal LNG imports might be required to meet domestic demand in the future. LPGs such as propane and butane are related to oil and natural gas both on the demand side (through its use for fuel and heating) and the supply side (production comes from both natural gas liquids processing and crude oil refining). The shale gas boom provides a natural experiment to evaluate the effects of a significant and persistent supply shock on the historically stable LPG/oil price relationship. This question is of interest in terms of establishing the relationship between oil, natural gas and LPG markets, and in terms of the future development of U.S energy markets. Testing the stability of the long-run relationships is done by imposing restrictions on the general model
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