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Shale Gas Boom Affecting the Relationship Between LPG and Oil Prices

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Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil. This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q35: Hydrocarbon Resources, Q38: Nonrenewable Resources and Conservation: Government Policy

Keywords: Liquefied petroleum gas, natural gas, oil, cointegration, price analysis

DOI: 10.5547/01956574.36.4.aogl

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Published in Volume 36, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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