Is hub-based pricing a better choice than oil indexation for natural gas? Evidence from a multiple bubble test

Zhang, D, Wang, T, Shi, X and Liu, JL ORCID: 0000-0002-2978-6022 2018, 'Is hub-based pricing a better choice than oil indexation for natural gas? Evidence from a multiple bubble test' , Energy Economics, 76 , pp. 495-503.

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Abstract

Oil indexation and hub-based pricing are two competing pricing mechanisms in the international natural gas markets. The debates over whether hub-based pricing is preferable to oil indexation have become intense among academics and practitioners, for example, whether and when East Asia should adopt hub pricing. This paper contributes empirically to the debate using a multiple bubble test. Adopting the generalized sup augmented Dickey-Fuller test proposed by Phillips et al. (2015), we show that more explosive bubbles exist in Japan and European gas prices than in the US prices. The argument is that hub-based pricing mechanism can better reflect fundamental values in the gas markets and thus is less subject to speculations. Given the recent trend of financialization in energy markets, gas prices are more likely to deviate from fundamental values when they are not clear to investors. Although oil indexation is simple and has been an effective tool over the past few decades, our results suggest that hub pricing is associated with less extreme price movements in the market and thus is a better choice for both policy makers and practitioners.

Item Type: Article
Schools: Schools > Salford Business School
Journal or Publication Title: Energy Economics
Publisher: Elsevier
ISSN: 0140-9883
Related URLs:
Funders: National Natural Science Foundation of China
Depositing User: JL Liu
Date Deposited: 30 Nov 2018 09:08
Last Modified: 06 Dec 2018 19:13
URI: http://usir.salford.ac.uk/id/eprint/49091

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