Prof. Fulvio Fontini: Economics of Electricity



"Testing persistence of WTI and Brent long-run relationship after the shale oil supply shock" - Published on Energy Economics.

In this paper, Fulvio Fontini (Department of Economics and Management, University of Padua), Massimiliano Caporin (Department of Statistical Sciences, University of Padua) and Elham Talebbeydokhti (Department of Economics and Management, University of Padua), have studied the long-run relationship in the WTI-Brent oil time series, taking into account the occurrence of two relevant events: the rise of shale oil production, in early 2011, and the widening and closing of the WTI-Brent price spread, from 2011 to 2014.

The authors then estimate a Vector Error Correction Model (VECM), considering thestructural break suggested by the cointegration test results, the timing of the rise in shale oil productionand the dynamics of the WTI-Brent price spread. Our analysis reveals that WTI and Brent crude oil priceshave had a long-run relationship up to 2011; no cointegration existed during the period of widening of thespread; again, a new long-run relationship arises after the closing of the gap, which includes the shale oilproduction. In the last period, the cross price elasticity of Brent on WTI slightly reduces compared to thepre-2011 era, whilst the shale oil production increases its importance in explaining the long-run relation-ship between WTI and Brent fivefold. Using the Generalized Impulse Response Functions (GIRFs) the authors finally study the impact of exogenous shocks on the variables, showing that in the first period, with limited shaleoil production, oil prices reacted to shale oil and not vice versa. After October 2014, the opposite becomestrue and shale oil production follows changes in both WTI and Brent prices.

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