This paper analyses the dynamics of crude oil and natural gas supply and demand, and assesses their impact on both energy prices and economic activity (namely, investments, industrial production and value added) in the Italian industrial sector. With respect to the existing literature, the main contribution of the work is to integrate the European natural gas market and the global crude oil market into one econometric model.
The results show that energy price movements are primarily explained by demand shocks, rather than supply shocks, both in the crude oil and natural gas markets. Adverse shocks in both the supply and demand of oil and gas lead to a decrease in industrial production, value added and investments in Italy. These effects are stronger and more persistent in the energy-intensive sectors in the event of crude oil supply shocks.
