Three Essays on Oil Markets and the Energy Consumption-Economic Growth Nexus

This thesis includes three essays which empirically deals with topics in energy economics. The first paper, "Testing Persistence of WTI and Brent Long-run Relationship after the Shale oil Supply Shock" is a joint paper with Prof. Fontini and Prof. Caporin. This paper mainly focus on impact of the fast-rising shale oil supplies on the spread between two main crude oil benchmarks. US oil market undergone a significant transformation with the unexpectedly strong rise in the US production of shale oil. The application of two technological innovations, horizontal drilling and hydraulic fracturing or fracking have enabled the US to grow dramatically the production of abundant shale oil resources. Shale oil, which is sometimes also known as tight oil or light tight oil (LTO) is petroleum that contains of light crude oil with low sulfur content, found in some rock formation deep below the earth's surface. Rapid production growth in shale oil had dramatic effects on US domestic oil price (WTI), which has decoupled from global indices (Brent). Historically, Brent and WTI crude oil prices tracked closely, with a price-difference per barrel between +_3 USD/bbl, with WTI usually priced higher. At the beginning of 2011, this historical relationship collapsed.From a global perspective, the rapid rise of US shale oil has been the main driver behind the increase in non-OPEC supply. The first chapter investigate what has been so far and what probably might be in the future the impact of shale oil production in the long-run WTI-Brent price relation- ship. More precisely, we investigate if we can statistically confirm that there was a long-run relationship in the WTI - Brent oil time series before the rise of shale oil production in the US market; if a structural break has occurred in the long-run relationship, and if so, when that has occurred and if it has coincided with the rise of the shale oil production; if, after the entrance in the market of abundant shale oil, a new long-run relationship has emerged between WTI and Brent prices, and if so of which kind. We also test the dynamics of the long-run relationships, namely, the relative impact of the changes of one series on the other series; on the convergence to the equilibrium, if any; and by how much this has been influenced by the shale oil production rise. We use monthly data of WTI and Brent crude oil prices, as well as US shale oil quantities from January 2000 to November 2017. The empirical results of the cointegration test taking a structural break into account show that the structural break occurs in February 2011. We estimate a Vector Error Correction Model (VECM), considering the structural break suggested by the cointegration test results and the timing of the rise in shale oil production, and compare full-sample analysis with sub-sample estimates of the VECM models. Our analysis reveals that WTI and Brent crude oil prices have had a long-run relationship up to 2011 but there is no longer such a long-run relationship after the rise of the shale oil production, even though, on the basis of the available data, it is not unequivocally possible to assess whether the absence of a new long-run relationship is permanent or not in the new shale oil period. Also short-run dynamics are analysed through the use of Impulse Response Functions (IRF). Moreover, we assess the impact on WTI and Brent prices of the shale oil production. The second paper, "Assessing Income, Urbanisation and Industrialisation Impacts on Energy Consumption: Where's the EKC in an Open Economy" is co-authored with Prof. Shahbaz and Prof. Md. Al Mamun. The paper primarily focuses on the effect of energy price, economic growth, urbanisation, industrialisation and trade openness on energy consumption. Thus, the key dependent variable is energy consumption while other variables are the key explanatory or treatment variables. We investigate the environmental Kuznets curve (EKC) hypothesis between economic growth and energy consumption by including, energy prices, urbanisation, industrialisation and trade openness in energy consumption function for the United Kingdom annual data from 1960 to 2015. In order to evaluate the EKC, the squared term of economic growth, urbanisation, industrialisation and trade openness is included in the set of explanatory variables. The EKC is said to exist for energy consumption if economic growth, urbanisation, industrialisation and trade openness is positively signed and economic growth, urbanisation, industrialisation and trade openness squared has a negative coefficient. First, the traditional as well as structural breaks unit root tests are applied in order to examine the stationary properties of the variables. To validate the presence of cointegration between energy consumption and its determinants, we applied ARDL bounds testing approach to cointegration by accommodating structural breaks in the series. Finally, the VECM Granger causality approach has been employed to determine direction of causal relationship between the variables. The empirical results indicate existence of cointegration between the variables. Our results show that energy prices are negatively linked with energy consumption. Income is positively linked with energy consumption. Industrialisation and trade openness add in energy consumption but urbanisation declines it. The nexus between urbanisation- energy and trade-energy validate the presence of inverted U-shaped relationship i.e. EKC effect. The relationship between industrialisation- energy and income-energy consumption is U-shaped. The research proposal, "Resiliency and Asymmetric Reaction to Price Changes of Shale Oil Rig Counts" is being developed together with Prof. Fontini, Prof. Caporin. We are still at the preliminary stage of the paper. We have a clear definition of research question and we already collect the necessary data for the empirical estimates. Even though, we define the baseline methodology, we need to run alternative tests with different methodologies, in order to increase the robustness of the analysis and investigate other model specification. In this paper, we explore the relationship between shale oil rig count and US crude oil price. Since US shale revolution stimulated tremendous oil and gas production, the number of US rig count became widely publicised. A drilling rig is a machine that creates holes in the earth sub-surface in order to drill a new well to explore for, develop and produce oil. Recently, US oil market has been characterised by fluctuating WTI prices and this makes difficult for oil producers to determine the profitability in exploration and development. Thus, it is wise to take a closer look at the relationship between oil rig count and crude oil prices. From 2011 onward, the relative importance of shale oil production over the total US oil supply has been significantly increasing so it is reasonable to focus on the relationship between shale rig count and crude oil prices in particular. Therefore, We split the total US rig count into shale rig count and non-shale rig count. We analyse how shale rig count and non-shale rig count and their production in US is affected by the changes in oil price while accounting for other determinants of this relationship. We also studied if this relationship is asymmetric for rises and drops of oil price. We test for the often claimed hysteresis hypothesis of the shale production in the case of crude oil price drops. The most relevant variables we use are weekly data on WTI price, the shale rig count, non-shale rig count, rig productivity and a set of potentially relevant economic and financial control variables from February 2011 up to October 2017 for total of 344 observations. This relationship is of significant interest to analysts, investors, oil companies, commercial banks, investment banks and policy makers.