The relationship between shale gas production and natural gas prices: An environmental investigation using structural breaks

This paper investigates the long-run cointegration relationship between shale gas production and natural gas prices during the period from January 2007 to December 2016 for 16 states in the U.S., by utilizing the Generalized Least Squares (GLS) based univariate unit root test, the PANICCA panel unit root test, the cointegration tests of Gregory and Hansen (1996), Westerlund and Edgerton (2008) as well as Banerjee and Carrión-i-Silvestre (2015) tests with structural breaks. The empirical finding shows that the mean-reverting property exists in both variables, and most structural breaks emerge around 2007-2009 and 2011-2014, during the period when shale gas production sharply increased, the global financial crisis erupted, and external energy shocks emerged. We also find a strong cointegrated relationship, denoting a long-run equilibrium property appears among the variables. Overall, we demonstrate an interaction nexus between price and production variables and put forward some vital implications for authorities and gas market participants.