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The Relationship between Crude Oil and Natural Gas Prices: The Role of the Exchange Rate

Several previous studies have found evidence that oil and natural gas prices in the United States are cointegrated. There is also evidence, however, that the relationship is unstable. One explanation is that technological changes alter the substitutability between natural gas and oil products. We reaffirm this finding, but also find evidence that the exchange rate influences the relative price of oil to natural gas in the United States. As in previous studies, we again find that short run departures from long run equilibrium are influenced by weather, product inventories, other seasonal factors and supply shocks such as severe tropical storms in the Gulf of Mexico. Keywords: Oil/natural gas relative price, Cointegration, Exchange rate, Nontraded and traded goods

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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q35: Hydrocarbon Resources, Q40: Energy: General, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q38: Nonrenewable Resources and Conservation: Government Policy, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels

DOI: 10.5547/01956574.35.2.2

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Published in Volume 35, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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