Working Papers

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

Abstract

The 2022 European energy crisis exposed the central role of supply substitution in natural gas markets, as disruptions to Russian pipeline flows were accompanied by a sharp surge in liquefied natural gas (LNG) imports. This paper revisits the fundamentals of the European natural gas market by explicitly distinguishing between pipeline gas and LNG supplies. Using a Bayesian Structural Vector Autoregression (SVAR) identified through sign and elasticity restrictions, the analysis jointly identifies the contemporaneous elasticities of natural gas prices, supply by source, inventories, and euro area industrial production. The results reveal pronounced heterogeneity across supply channels: pipeline gas is highly price inelastic, whereas LNG serves as the primary adjustment channel on the supply side. Although both supply shocks affect prices, pipeline disruptions generate sharp but short-lived inflationary effects, while LNG supply shocks exert more persistent influences on price dynamics. More broadly, the dynamics of gas prices exhibit a clear horizon-dependent structure, with short-run fluctuations driven by supply shocks and inventory behavior, and medium- to long-run movements increasingly shaped by aggregate demand forces. Counterfactual scenarios of the 2022 energy crisis quantify the stabilizing role of LNG availability and demand adjustment, highlighting how supply composition critically shapes energy price dynamics in Europe.

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!)