What Drives Drilling Up and Prices Down? - Structural Vector Autoregressive Model of the U.S. Natural Gas Market

Valentin Winkler ()

No 217-2023, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: This study uses a structural vector autoregressive (SVAR) model to examine the relationships between the intensity of drilling (i.e. investment) for natural gas production, natural gas withdrawals, economic activity and natural gas prices in the United States. The results show that the reaction of drilling to an unexpected change in natural gas prices depends on the source of the price change. Specifically, I find that the reaction of drilling is significantly stronger after an economic activity shock than after a gas demand shock (e.g. due to oil price fluctuations). In addition, it is shown that demand-side factors were more important than supply-side factors in explaining the 85% drop in natural gas prices from June 2008 to April 2012. This contradicts prevailing explanations focused on shale gas development and should dampen the expectations of policy makers seeking to rapidly expand shale gas production in order to obtain similar cheap energy as the U.S. after 2008.

Pages: 54 pages
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:217-2023

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