How Integrated are the Local U.S. Markets for Natural Gas? — New Evidence Using Rolling Cointegration

Abstract

In this paper we investigate the degree of market integration for natural gas in the USA. We perform a rolling cointegration estimation of the city gate gas price and the overall gas price in the USA. The long run adjustment coefficients of all states are reported over a rolling window of 60 month from 1989 to 2013. We can identify eight distinct clusters. Clusters are characterized by a different level adjustment on average. Estimates suggest half-life times ranging from 3 weeks to 6 month. Several regulatory actions in order to liberalize the market of natural gas have an effect in terms of the level relationship. These effects are limited. However, we cannot find these structural breaks in all states. The latest change in exploration technologies, hydraulic fracturing and horizontal drilling, does not yet seem to play an important role to explain price dynamics and market integration.