Which risks drive European natural gas bubbles? Novel evidence from geopolitics and climate

Abstract

Ensuring the natural gas market's sound and ordered progress is crucial to Europe's sustainable development. This investigation employs the Generalized Supremum Augmented Dickey-Fuller (GSADF) approach to explore whether there are multiple bubbles in the European natural gas market. Also, we further investigate the influencing factors that contributed to these boom and bust episodes. The empirical results suggest that the multiple European natural gas bubbles are mostly accompanied by abnormal fluctuations, which is consistent with the asset pricing model. In addition, geopolitical and climate factors could increase the possibility of European natural gas bubbles, where the “cold winter” caused by the La Nina event brings more impetus to these bubbles than the “warm winter” due to the El Nino phenomenon, and Russia's geopolitical conflict with Ukraine is more likely to cause bubbles. Besides, the international oil market and European economic situation also exert positive effects on such explosive behaviours. Against the backdrop of an increasingly serious energy crisis in Europe, the above conclusions provide valuable implications to promote European sustainable development by reducing over-dependence on Russian energy and preventing dramatic surges in natural gas demand.