The Role of Institutional Backgound for US Shale Gas Production Boom : Did the Boom Affect the Cointegration of World Crude Oil Markets?

Abstract

The purpose of this paper is to suggest unique institutions leading to shale production boom in USA as of 2010 and explore that the shale-boom consequently influences synchronicity in international crude oil markets. It is suggested that fiscal incentives, private ownership of mineral rights, and competitive conditions in natural gas industry by deregulation were bases of the shale production boom in USA unlike other countries even with large oil and gas reserves. In addition, a cointegration test for multiple periods identified by Bai and Perron (2003) finds that US crude oil market was decoupled from the world crude markets from 2011 to 2016, when coincides with the shale production boom. In conclusion, this paper provides three implications: (1) institution matters for encouraging market production, (2) nature of international oil markets was changed during US shale gas production boom period, (3) sub-periods analysis based on structural changes in time-varying market is essential for more accurately testing cointegration of international crude markets.