Converging in Crisis: The International Impact of Europe’s Energy Crisis on Natural Gas Prices

Abstract

In the span of seven years, the United States has switched from being a net importer of LNG to the largest LNG exporter in the world. This is a historic shift in energy markets that has received little attention in the literature despite the persistent and immense effects it has had. The effects of the ongoing energy crisis in Europe only add impetus to the study of energy markets, where the constriction of Russian energy exports has seen the historic entrance of the U.S. as a major energy provider to Europe. Accordingly, this paper seeks to analyse the effect of U.S. LNG exports on global market integration, in addition to the effect of the recent European energy crisis on this integration. This papers thus employs bivariate linear and threshold cointegration techniques to analyse the degree of integration between key European & Asian natural gas prices and oil prices. Results confirm recent findings that European natural gas prices became more integrated during 2016 to 2020 with U.S. natural gas prices whilst oil prices decoupled from U.S. gas prices. However, this paper also finds that when extending the time frame to the present day, these effects appear to reverse. Long-term equilibrium relationships weaken between foreign natural gas prices and U.S. gas prices, while such relationships between oil and U.S. natural gas prices appear stronger than before the U.S. began exporting LNG. Notably, short-term adjustments between U.S. and foreign natural gas prices increase in speed post 2020, indicating heightened price transmission and the potential emergence of a spot LNG market.