A sort of reader Show that this is the case. Well, if there is an integrated gas market, maybe. (Answer to expected question: Duh, NO).
It is useful to take a look at the actual data (i.e. connect it to reality). I have plotted US gas prices (Henry Hub) and TTF Dutch gas prices for the past 10 years as of today.
It’s hard for me to see a high correlation between the two (even if HH is in USD and TTF Dutch is in EUR), partly due to the February 2021 US price spike (thanks ERCOT!).
I can download the data from somewhere and do some regressions – but I know from my previous work (back in the days of the Cheney Energy Policy Development Working Group) that the natural gas market has historically been fragmented, despite the development of LNG Transportation, barriers remain.
A recent study confirmed my impression (not peer-reviewed, but the method seems plausible to me.) from Lorello et al. (2022):
…[T]His research conducted growth convergence testing and cluster analysis on a panel consisting of four established natural gas price benchmarks and two emerging price benchmarks extended to the pre-Covid-19 period. The most important finding is that there is no natural gas price convergence outside Europe. Although there are partial convergence events identified in the literature and reproduced and explained here. Importantly, the results strongly reject the hypothesis that increased LNG flows act as a price-equilibrium arbitrage mechanism.
Once you see the relative magnitude of traffic, it becomes clear why price equalization is impossible.
The authors conducted two tests, one involving panels and one involving binary estimation of the law of one price for natural gas prices using a Kalman filter. I’ll rely on the latter (mostly because I understand what’s going on there). Quite simply, convergence to the Law of One Price (LOOP) means that a coefficient (allowed to vary with time) moves towards.
resource: Lorello (2022).
For shorter samples:
resource: Lorello (2022).
The unit factor represents LOOP. Note that you can always reject Henry Hub’s unity factor with pretty much anyone else, but that’s certainly true for TTF Dutch, which is related to our question of whether pumping more gas in the US will Impact on gas prices in Europe.
Bottom line: Stay away from simple-minded recipes like “Russia can’t put pressure on Europe if we pump more gas in the US”; more basically, take 30 seconds to do some research before you speak.
