Are Oil and Natural Gas Going Separate Ways in the UK? Cointegration Tests with Structural Shifts

31 Pages Posted: 27 Dec 2011

See all articles by Roy Endre Dahl

Roy Endre Dahl

University of Stavanger

Atle Oglend

University of Stavanger

Petter Osmundsen

University of Stavanger; CESifo (Center for Economic Studies and Ifo Institute)

Marius Sikveland

University of Stavanger

Date Written: December 26, 2011

Abstract

Previous analyses show that British spot market prices for gas follow the same pattern as the global oil price, i.e., we have an integrated market for energy. In recent years there are several developments in the British gas market that may call for a different price relationship. The spot market for gas has become more liquid, and an increasing fraction of gas is used for electricity generation - thus competing against coal and nuclear power. Moreover, there is an increasing LNG import, and there may have been a change in the perception of relative scarcity of oil and natural gas as well as the effectiveness of the OPEC cartel. Analysing more recent data and applying newer analytical tools that allow for endogenous structural shifts, we test whether oil and gas prices in the UK still are cointegrated. We find structural shifts in 2006 and 2007, and after the second structural shift, the evidence for oil and gas markets being cointegrated are much weaker. Specifically the stochastic trend in Brent oil seems less predominant in the movement of NBP gas price.

Suggested Citation

Dahl, Roy Endre and Oglend, Atle and Osmundsen, Petter and Sikveland, Marius, Are Oil and Natural Gas Going Separate Ways in the UK? Cointegration Tests with Structural Shifts (December 26, 2011). Available at SSRN: https://ssrn.com/abstract=1977107 or http://dx.doi.org/10.2139/ssrn.1977107

Roy Endre Dahl

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Atle Oglend (Contact Author)

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Petter Osmundsen

University of Stavanger ( email )

4036 Stavanger
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Marius Sikveland

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

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