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UK Natural Gas: Gas-Specific or Oil Driven Pricing?

Author

Listed:
  • Frank Asche
  • Atle Oglend
  • Petter Osmundsen

Abstract

In this paper we investigate the time-varying relationship between oil and natural gas in the UK. We develop a model where relative prices can move between pricing-regimes; markets switch between being decoupled and integrated. Our model endogenously accounts for periods where oil and natural gas temporarily decouple due to gas specific pricing. We show that gas-specific pricing is primarily related to fall/winter peak-load gas pricing and that mean reversion in relative prices is dependent on the time of the year. Most of the reversion back to oil occurs in spring and summer when demand for gas to heating and electricity is low and net-availability and transport capacity high. Accounting for periods of gas specific pricing is relevant when determining the long-run equilibrium value of oil relative to natural gas. Utilizing the regime where evidence is strongest for integrated markets we find that oil is historically priced at 2.3 times the value of natural gas in the UK, and that markets have been decoupled for 49% of the sample. Our results do not indicate that peak-load pricing has become more prevalent in recent years, i.e., we find no evidence of underinvestment in capacity after deregulation.

Suggested Citation

  • Frank Asche & Atle Oglend & Petter Osmundsen, 2013. "UK Natural Gas: Gas-Specific or Oil Driven Pricing?," CESifo Working Paper Series 4503, CESifo.
    • Handle: RePEc:ces:ceswps:_4503
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    References listed on IDEAS

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    Cited by:

    1. Mason, Charles F. & A. Wilmot, Neil, 2014. "Jump processes in natural gas markets," Energy Economics, Elsevier, vol. 46(S1), pages 69-79.
    2. Frank Asche & Atle Oglend & Petter Osmundsen, 2017. "Modeling UK Natural Gas Prices when Gas Prices Periodically Decouple from the Oil Price," The Energy Journal, , vol. 38(2), pages 131-148, March.

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    More about this item

    Keywords

    oil; natural gas; seasonality; regime switching; demand; capacity; commodity price dynamics;
    All these keywords.

    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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