The Annals of Regional Science

, Volume 54, Issue 1, pp 117–142 | Cite as

Price formulation and the law of one price in internationally linked markets: an examination of the natural gas markets in the USA and Canada

  • Kyle K. Olsen
  • James W. Mjelde
  • David A. Bessler
Original Paper


The degree to which the law of one price holds (integration) along with determining each individual markets’ role in price discovery is examined for 11 major natural gas markets, six from the USA and five from Canada. Deregulation, technological advances, and trade agreements have opened the USA’s and Canada’s natural gas market to new and extensive interactions. The 11 natural gas market prices are tied together with ten long-run co-integration relationships with all markets included in the co-integration space, providing evidence the markets are integrated. The degree of integration varies by region. Markets geographically adjacent to each other tend to be more highly integrated than markets separated by distance. Further results indicate that there is no clear price leader among the 11 markets. Including more US and Canadian markets than previous studies, show markets in both eastern and western USA and Canada are important in the price discovery process.

JEL Classification

Q41 L71 


  1. Bernanke B (1986) Alternative explanations of the money-income correlation. Carnegie Rochester Conf Ser Public Policy 25:49–99CrossRefGoogle Scholar
  2. Bernanke BS, Boivin J, Eliasz P (2005) Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. Q J Econ 120:387–422Google Scholar
  3. Bessler DA, Akleman DG (1998) Farm prices, retail prices, and directed graphs: results for pork and beef. Am J Agric Econ 80:1145–1150CrossRefGoogle Scholar
  4. Brown SPA, Yücel MK (2008) Deliverability and regional pricing in US natural gas markets. Energy Econ 30:2441–2453CrossRefGoogle Scholar
  5. Brown SPA, Yücel MK (2009) Market arbitrage: European and North American natural gas prices. Energy J 30(Special Issue):167–185Google Scholar
  6. Bukenya JO, Labys WC (2005) Price convergence on world commodity markets: fact or fiction? Inter Reg Sci Rev 28:302–329CrossRefGoogle Scholar
  7. Canada By Map (2009) All places and metropolitan areas in Canada. Accessed 14 April 2010
  8. Chickering DM (2002) Optimal structure identification with greedy search. J Mach Learn Res 3:507–554Google Scholar
  9. Cuddington J, Wang Z (2006) Assessing the degree of spot market integration for US natural gas: evidence from daily price data. J Regul Econ 29:195–210CrossRefGoogle Scholar
  10. DeVany A, Walls WD (1993) Pipeline access and market integration in the natural gas industry: evidence from cointegration tests. Energy J 14:1–19Google Scholar
  11. DeVany A, Walls WD (1994) Open access and the emergence of a competitive natural-gas market. Contemp Econ Policy 12:77–96CrossRefGoogle Scholar
  12. DeVany A, Walls WD (1996) The law of one price in a network: arbitrage and price dynamics in natural gas city gate markets. J Reg Sci 36:555–570CrossRefGoogle Scholar
  13. Doane MJ, Spulber DF (1994) Open access and the evolution of the United States spot market for natural gas. J Law Econ 37:477–517CrossRefGoogle Scholar
  14. Giri R (2012) Local costs of distribution, international trade costs and micro evidence on the law of one price. J Int Econ 86:82–100CrossRefGoogle Scholar
  15. Hansen H, Juselius K (1995) CATS in RATS: cointegration analysis of time series. Estima, EvanstonGoogle Scholar
  16. Hoover KD (2005) Automatic inference of the contemporaneous causal order of a system of equations. Econ Theory 21:69–77CrossRefGoogle Scholar
  17. Hyvärinen A, Karhunen J, Oja E (2001) Independent component analysis. Wiley, HobokenCrossRefGoogle Scholar
  18. Johansen S (1992) Determination of cointegration rank in the presence of a linear trend. Oxf Bull Econ Stat 54:383–397CrossRefGoogle Scholar
  19. Jorgenson DW, Slesnick DT (1985) Efficiency versus equity in natural gas price regulation. J Econ 30:301–316CrossRefGoogle Scholar
  20. Juselius K (2006) The cointegrated VAR model. Oxford University Press, OxfordGoogle Scholar
  21. Kao CW, Wan JY (2009) Information transmission and market interactions across the Atlantic - an empirical study on the natural gas market. Energy Econ 31:152–161CrossRefGoogle Scholar
  22. King M, Cuc M (1996) Price convergence in North American natural gas spot markets. Energy J 17:17–42CrossRefGoogle Scholar
  23. Kleit AN (1998) Did open access integrate natural gas markets? An arbitrage cost approach. J Regul Econ 14:19–33CrossRefGoogle Scholar
  24. Leitzinger J, Collette M (2002) A retrospective look at wholesale gas: industry restructuring. J Regul Econ 21:79–101CrossRefGoogle Scholar
  25. Micola AR, Bunn DW (2007) Two markets and a weak link. Energy Econ 29:79–93CrossRefGoogle Scholar
  26. Mjelde JW, Bessler DA (2009) Market integration among electricity markets and their major fuel source markets. Energy Econ 31:482–491CrossRefGoogle Scholar
  27. Mohammadi H (2011a) Long-run relations and short-run dynamics among coal, natural gas and oil prices. Appl Econ 43:129–137CrossRefGoogle Scholar
  28. Mohammadi H (2011b) Market integration and price transmission in the U.S. natural gas market: from the wellhade to end use markets. Energy Econ 33:227–236CrossRefGoogle Scholar
  29. Movassagh N, Modjtahedi B (2005) Bias and backwardation in natural gas futures prices. J Futur Mark 25:281–308CrossRefGoogle Scholar
  30. Mu X (2007) Weather, storage, and natural gas price dynamics: fundamentals and volatility. Energy Econ 29:46–63CrossRefGoogle Scholar
  31. National Energy Board (2002) Canadian natural gas market dynamics and pricing: an update. Accessed 15 April 2010
  32. National Energy Board (2010) How Canadian markets work. Accessed 15 Dec 2010
  33. National Oceanic and Atmospheric Administration, Satellite and Information Service (2009) Accessed 15 April 2010
  34. (2004) Processing natural gas. Accessed 6 Jan 2014
  35. Neumann A (2009) Linking natural gas markets: is LNG doing its job? Energy J 30(Special Issue):187–199Google Scholar
  36. Neumann A, Siliverstovs B, von Hirschhausen C (2006) Convergence of European spot market prices for natural gas? a real-time analysis of market integration using the Kalman filter. Appl Econ Lett 13:727–732CrossRefGoogle Scholar
  37. North America Energy Working Group (2002) North America the energy picture. Accessed 15 Aug 2009
  38. North American Free Trade Secretariat (undated) Chapter six: energy and basic petrochemicals, part two: trade in goods. Accessed 3 Jan 2014
  39. Neuhoff K, von Hirschhausen C (2005) Long-term vs. short-term contracts: a European perspective on natural gas. Working paper available at Accessed 15 Aug 2014
  40. Park H, Mjelde JW, Bessler DA (2007) Time-varying threshold cointegration and the law of one price. Appl Econ 39:1091–1105CrossRefGoogle Scholar
  41. Park H, Mjelde JW, Bessler DA (2008) Price interactions and discovery among natural gas spot markets in North America. Energy Policy 36:290–302CrossRefGoogle Scholar
  42. Pearl J (2000) Causality: models, reasoning, and inference. Cambridge Press, CambridgeGoogle Scholar
  43. Pérez-Pascual PA, Sanz-Carnero B (2011) Law of one price: evidence from the Spanish wheat market. Ann Reg sci 47:329–351CrossRefGoogle Scholar
  44. Renou-Maissant P (2012) Toward the integration of European natural gas markets: a time varying approach. Energy Policy 51:779–790CrossRefGoogle Scholar
  45. Roeber J (1996) The development of a UK natural gas spot market. Energy J 17:1–15CrossRefGoogle Scholar
  46. Samuelson PA (1952) Spatial price equilibrium and linear programming. Am Econ Rev 42:283–303Google Scholar
  47. Serletis A (1997) Is there an east-west split in North American natural gas markets? Energy J 18:47–62CrossRefGoogle Scholar
  48. Serletis A, Rangel-Ruiz R (2004) Testing for common features in North American energy markets. Energy Econ 26:401–414CrossRefGoogle Scholar
  49. Shimizu S, Hoyer PO, Hyvärinen A, Kerminen A (2006) A linear non-Gaussian acyclic model for causal discovery. J Mach Learn Res 7:2003–2030Google Scholar
  50. Shrestha K (2014) Price discovery in energy markets. Energy Econ 45:229–223CrossRefGoogle Scholar
  51. Siliverstovs B, Hégaret GL, Neumann A, Hirschhausen C (2005) International market integration for natural gas? A cointegration analysis of prices in Europe, North America and Japan. Energy Econ 27:603–615CrossRefGoogle Scholar
  52. Sims C (1980) Macroeconomics and reality. Econometrica 48:1–48CrossRefGoogle Scholar
  53. Spirtes P, Glymour C, Scheines R (2000) Causation, prediction, and search. MIT Press, CambridgeGoogle Scholar
  54. Statistics Canada (2010) Population by year, by province and territory. Accessed 15 Dec 2010
  55. Statistics Canada (2011) Report on energy supply and demand in Canada 2009 preliminary. Catalogue no. 57–003-X. Accessed 12 May 2011
  56. Stock JH, Watson MW (2002) Forecasting using principal components from a large number of predictors. J Am Stat Assoc 97:1167–1179CrossRefGoogle Scholar
  57. Swanson NR, Granger CWJ (1997) Impulse response functions based on a causal approach to residual orthogonalization in vector autoregressions. J Am Stat Assoc 92:357–367CrossRefGoogle Scholar
  58. Takayama T, Judge GG (1964) Equilibrium among spatially separated markets: a reformulation. Econometrica 32:510–524CrossRefGoogle Scholar
  59. Taylor AM (2001) Potential pitfalls for the purchasing-power-parity puzzle? Sampling and specification biases in mean-reversion tests of the law of one price. Econometrica 69:473–498CrossRefGoogle Scholar
  60. TETRAD IV (2004) The tetrad project: causal models and statistical data. Accessed 12 Jan 2011
  61. Timmer RP, Lamb PJ (2007) Relations between temperature and residential natural gas consumption in the Central and Eastern United States. J Appl Meteorol Clim 46:1993–2013CrossRefGoogle Scholar
  62. U.S. Census Bureau (2003) Table 3a. Population in metropolitan and micropolitan statistical areas ranked by 2000 population for the United States and Puerto Rico: 1990 and 2000. Accessed 14 April 2010
  63. U.S. Department of Energy, Energy Information Administration (1995) Energy policy act transportation study: interim report on natural gas flows and rates. Accessed 15 April 2010
  64. U.S. Department of Energy, Energy Information Administration (2009a) Figure SR1. Flow of natural gas imports and exports, 2009. Accessed 12 Dec 2010
  65. U.S. Department of Energy, Energy Information Administration (2009b) Natural gas market centers: a 2008 update. Accessed 15 April 2010
  66. U.S. Department of Energy, Energy Information Administration (2009c) Natural gas weekly. Various issues. Accessed 12 April 2009
  67. U.S. Department of Energy, Energy Information Administration (2010) Locations of U.S. natural gas import and export points, 2009. Accessed 12 Dec 2010
  68. U.S. Department of Energy, Energy Information Administration (2011) Natural gas summary. Accessed 15 May 2011
  69. U.S. Department of Energy, Office of Fossil Energy (Undated) How to obtain authorization to import and/or export natural gas and LNG. Accessed 3 Jan 2014
  70. U.S. Department of State (2013) U.S. Relations with Canada, Fact Sheet August 23, 2013. Accessed 3 Jan 2014
  71. World Trade Organization (2014) Understanding the WTP: basics principles of the trading system. Accessed 3 Jan 2014
  72. Walls WD (1994) Price convergence across natural-gas fields and city markets. Energy J 15:37–48Google Scholar
  73. Walls WD (1995) An econometric-analysis of the market for natural-gas futures. Energy J 16:71–83Google Scholar
  74. Wang Z, Bessler DA (2005) A Monte Carlo study on the selection of cointegrating rank using information criteria. Econom Theory 21:593–620CrossRefGoogle Scholar
  75. Zagaglia P (2010) Macroeconomic factors and oil futures prices: a data-rich model. Energy Econ 32:409–417CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • Kyle K. Olsen
    • 1
  • James W. Mjelde
    • 2
  • David A. Bessler
    • 2
  1. 1.Lariat Financial ServicesCollege StationUSA
  2. 2.Department of Agricultural EconomicsTexas A&M UniversityCollege StationUSA

Personalised recommendations