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Testing for Market Integration: Crude Oil, Coal, and Natural Gas

Abstract:
Prompted by the contemporaneous spike in coal, oil, and natural gas prices, this paper evaluates the degree of market integration both within and between crude oil, coal, and natural gas markets. Our approach yields parameters that can be readily tested against a priori conjectures. Using daily price data for five very different crude oils, we conclude that the world oil market is a single, highly integrated economic market. On the other hand, coal prices at five trading locations across the United States are cointegrated, but the degree of market integration is much weaker, particularly between Western and Eastern coals. Finally, we show that crude oil, coal, and natural gas markets are only very weakly integrated. Our results indicate that there is not a primary energy market. Despite current price peaks, it is not useful to think of a primary energy market, except in a very long run context.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Markets and Prices; Coal – Markets and Prices

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Oil, Coal, natural gas, cointegration, market integration, US

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No2-4


Published in Volume 27, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.