Natural Gas Prices in the Framework of European Union's Energy Transition: Assessing Evolution and Drivers

This study analyzes European natural gas (NG) prices since the eve of the 2008 financial crisis. Spearman's rank correlation coefficients associate prices with and without taxation, whereas a hierarchical clustering analysis clarifies similarities in NG pricing behavior. After performing econometric tests to ensure the satisfaction of classical hypotheses and identify a system of endogenous variables, structured unrestricted and restricted vector autoregressive models are applied to panel data composed of 34 spatial units and 31 units of time drawn from 2007-2022 to confirm the presence of short-term and long-term causal dependencies. The nonparametric analysis identifies three groups of countries that exhibit a differentiated pricing behavior. The parametric analysis reveals a significant and asymmetric short run relation, which is imposed by liquefied natural gas (LNG) imports from Nigeria on the logarithm of NG prices. However, the sign of coefficients associated with lagged LNG imports varies across spatial units belonging to the sample. The error correction term is negative and significant, which implies evidence of cointegration. Since the main result identifies ambiguous short-term effects emerging from the diversification in favor of LNG imports from Nigeria, a straightforward policy recommendation is that this strategic option may be ill advised for Europe and, indirectly, it legitimizes the suggestion that alternative decarbonization options can play a prominent role in European NG markets in the near future.

Automated summary

This study analyzes European natural gas (NG) prices since the eve of the 2008 financial crisis. The study found that NG prices are significantly influenced by taxation, and identified similarities in NG pricing behavior through Spearman's rank correlation coefficients and hierarchical clustering analysis. Econometric tests and panel data models were applied to confirm short-term and long-term causal dependencies. Nonparametric and parametric analyses revealed differentiated pricing behavior among countries and a significant short-term relationship between LNG imports from Nigeria and NG prices. The presence of cointegration was also confirmed. The study suggests that relying on LNG imports from Nigeria may not be a wise strategic option for Europe, and alternative decarbonization options may play a prominent role in European NG markets in the near future.