Abstract
The expansion of shale gas production since the mid-2000s which is commonly referred to as “shale gas revolution” has had large impacts on global energy outlook. The impact is particularly substantial when it comes to the oil market because natural gas and oil are substitutes in consumption and complements and rivals in production. This paper investigates the price externality of shale gas revolution on crude oil. Applying a structural vector autoregressive model (VAR) model, the effect of natural gas production on real oil price is identified in particular, and then based on the identification, counterfactuals of oil price without shale gas revolution are constructed. We find that after the expansion of shale gas production, the real West Texas Intermediate (WTI) oil price is depressed by 10.22 USD/barrel on average from 2007 to 2017, and the magnitude seems to increase with time. In addition, the period before shale gas revolution is used as a “thought experiment” for placebo study. The results support the hypothesis that real WTI oil price can be reasonably reproduced by our models, and the estimated gap for oil price during 2007–2017 can be attributed to shale gas revolution. The methodology and framework can be applied to evaluate the economic impacts of other programs or policies.
Highlights
Over the past several years, unconventional gas has gained centre stage in the global energy market, which is mainly driven by rapid development in the US shale gas production [1]
The analysis in this paper relies on identifying the impulse of natural gas production on oil price, and the counterfactuals of real oil price without the production of shale gas could be constructed by extracting this impulse driven by shale gas revolution
Our results suggest that for the 2007–2013 period, real West Texas Intermediate (WTI) oil price was reduced price was reduced by an average of 6.93 USD/barrel while before shale gas revolution it was only by an average of 6.93 USD/barrel while before shale gas revolution it was only −0.16 USD/barrel
Summary
Over the past several years, unconventional gas has gained centre stage in the global energy market, which is mainly driven by rapid development in the US shale gas production [1]. During the mid-2000s, the application of hydraulic fracturing and horizontal drilling in the US, coupled with the surge in gas prices, enabled the extraction of huge quantities of natural gas from shale [2]. The production of shale gas has increased thirteen times between 2007 and 2016. In 2016, shale gas output was 17,032 billion cubic feet (Bcf), which was more than twice the total energy consumption of China in that year (7268 Bcf). The proportion of shale gas production in total US natural gas production increased from 2.2% in 2000 to 52.2% in 2016
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