Designs (Nov 2020)
The Effects of Structural Breaks on Energy Resources in the Long Run. Evidence from the Last Two Oil Price Crashes before COVID-19
Abstract
The course of events since 2014, including the worldwide pandemic of a coronavirus disease, have shown that oil market fundamentals have not always been clearly anticipated and that additional external factors, rather than those related to supply and demand, do play important roles in signaling future price changes. Within that complex setting, this study examined the influences of structural breaks on the long-term properties of Brent crude oil, gasoil, low-sulfur fuel oil, natural gas, and coal over the period 2002–2018. In an effort to assess the impacts of these structural changes, we identified time points at which structural break changes occurred and unit root properties using a representative variety of unit root testing alternatives. From the estimation results, we observed that only fuel oil and national balancing point (NBP) prices show evidence of mean-reverting behavior, suggesting that shocks to these two markets are short-lived when allowing for structural breaks. Although the idea of market forces bringing the non-renewable markets to their equilibrium in the long run makes the role of policy-making more challenging, it highlights the importance of the policy mix in the transition to a low-carbon energy system.
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