Working Papers

Revisiting Fundamentals of the European Gas Market: The Role of Supply Substitution
Slides Paper

Abstract

We study the European natural gas market through a Bayesian Structural Vector Autoregression that distinguishes pipeline gas from liquefied natural gas (LNG), with contemporaneous elasticities identified through sign and elasticity restrictions. Pipeline gas is highly price-inelastic and propagates supply disruptions as transient spikes, whereas LNG acts as the flexible balancing margin with more persistent price effects. Three counterfactual exercises quantify the contributions of supply substitution and demand adjustment during the 2022 energy crisis. Preventing European LNG imports from expanding during the crisis raises the real price by roughly 125% relative to its observed path. At the opposite extreme, allowing LNG imports to fully absorb the contemporaneous pipeline-and-domestic shortfall lowers prices by about 82%. Eliminating the autonomous demand-reduction signal identified by the model over the formal EU policy window raises prices by approximately 35%. The realised path lies closer to the LNG-frozen upper bound than to the LNG-unconstrained lower bound, consistent with Europe's limited regasification capacity binding during the crisis. A forward-looking scenario fan applied to the 2026 Strait of Hormuz crisis shows that the price impact depends sharply on whether the disruption resolves promptly or persists: median twelve-month price gaps range from roughly −5% under prompt recovery to +34% under a chronic disruption and +127% if a second wave materialises. The asymmetry underscores geographic diversification of LNG supply as a complementary energy-security instrument alongside receiving-side infrastructure.

Work in progress

Nonlinear price dynamics in gas and electricity spot markets (Abstract coming soon!)

New measures of market-based monetary policy surprises in macroeconomic outcomes (Abstract coming soon!)