The effects of combined-cycle generation and hydraulic fracturing on the price for coal, oil, and natural gas: Implications for carbon taxes

We identify how the increased efficiency of generating electricity using gas-fired combined-cycle technology and the increased production of natural gas due to hydraulic fracturing in the US affect the first purchase price for coal, oil, and natural gas and their prices at electricity generating plants by estimating a cointegrating vector autoregression model from monthly observations between January 1991 and February 2016. Simulation experiments indicate that combined-cycle generation raises the long-run price of natural gas, both at the wellhead and electricity generating plants. Conversely, the increased production of natural gas has a relatively small long run effect on natural gas prices. Historical counterfactuals indicate increased natural gas production since June 2003 lowers natural gas prices by an average of $0.16 per million BTU while combined cycle generation increases prices by an average of $0.54 per million BTU since April 1999. This increase is captured by natural gas producers such that the margin between prices at electricity generating plants and the wellhead shrinks by about $0.05 per million BTU. This analysis suggests that market relations among energy prices and their statistical ordering will reinforce the direct effects of a carbon tax on relative prices in ways that enhance interfuel substitution towards natural gas.