Dynamic Volatility Transfer in the European Oil and Gas Industry

The study examines dynamic volatility transmissions among European Energy industry participants along the production lines, using the Diebold and Yilmaz (2012)’s spillover index. We sort the sector participants, based on their production exposure, into Upstream, Midstream, Downstream, and Integrated Oil Gas (IOG) industry segments to provide unique insight about the source of volatility spillover. During the sample period of October 2006 to June 2022, we report significant internal volatility spillover among the European energy sector participants, primarily emanating from the group of Upstream firms. In subsamples, we show that downstream and midstream groups can also become volatility transmitters under certain conditions. More importantly, the large Russian IOG companies become significant volatility transmitter after 2022 with the Ukraine-Russia conflict, potentially causing major system instability because these IOG firms traditionally were volatility absorbers. Overall, we provide insights about the interconnectedness among European energy companies during normal and extreme market conditions and highlight important system dynamics that could be useful for policy makers and investors