The European energy crisis and the US natural gas market dynamics. A structural VAR investigation

Abstract

The Russian invasion of Ukraine triggered severe disruptions in the European energy markets and caused significant shifts in global natural gas flows. In this paper we investigate to what extent this European shock has affected the dynamics and altered the estimates of the elasticities on the U.S. natural gas market. For that purpose, we use the Bayesian Structural Vector Autoregression framework proposed by Baumeister and Hamilton (2019, BH) for the crude oil market and applied by Rubaszek, Uddin, and Szafranek (2021, RSU) to analyze the dynamics of U.S. natural gas market till year 2020. We modify the RSU model to account for natural gas trade and next derive the posterior of the model using observations till 2023. This allows us to approximate the impact of the European energy crisis on the U.S. market. Our result are twofold. First, we show that due to our modification the RSU model the estimates of the elasticities on the U.S. natural gas market change, while simply updating the same prior beliefs with most recent data impacts the posterior estimates to a very limited extent. Second, we find that even as major shock as the European energy crisis has only marginally contributed to the dynamics of the U.S. natural gas market. This result confirms earlier studies, which show that the U.S. natural gas market is barely affected by shocks to the European natural gas market.