Shale gas production and U.S. natural gas market dynamics: a TVP-VAR approach

The boom in the United States production of shale gas has significantly impacted domestic natural gas market from 2005, through increased trade flows, lower prices and increased consumption. In this paper, we investigated the role of the shale revolution in U.S. gas market dynamics. We provided a new outlook on the analysis of U.S. gas market analyzing possible instabilities in the parameters due to structural shocks. Using Bai and Perron test, we endogenously evidenced the existence of common structural breaks in relationships between shale gas production and other market variables: conventional gas production, imports, exports, spot price and consumption. Finally, we estimated interactions between variables using a TVP VAR model with stochastic volatility, which allows to reflect both time variation of the simultaneous relations among variables and heteroscedasticity of innovations. Our results support the evidence of high volatility episodes in the market variables over the period analyzed. An analysis of impulse responses to a shock in shale production indicated that these responses were not the same according to the variables and they varied over time. In addition, the transmission delays of shale gas production shocks increase during the period, which denotes market saturation. Our findings could be useful for understanding the U.S gas market dynamics, but also the shale oil market, whose development shows similarities with that of natural gas. This result can also contribute to the modeling of energy resources substitutions as part of the energy transition.