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

22 Pages Posted: 23 Dec 2013

See all articles by Frank Asche

Frank Asche

Stavanger University College

Atle Oglend

University of Stavanger

Petter Osmundsen

University of Stavanger; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 23, 2013

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.

Keywords: oil, natural gas, seasonality, regime switching, demand, capacity, commodity price dynamics

JEL Classification: Q310, Q410, Q470

Suggested Citation

Asche, Frank and Oglend, Atle and Osmundsen, Petter, UK Natural Gas: Gas-Specific or Oil Driven Pricing? (December 23, 2013). CESifo Working Paper Series No. 4503. Available at SSRN: https://ssrn.com/abstract=2371201

Frank Asche

Stavanger University College ( email )

PO Box 2557
Ullandhaug
4004 Stavanger
Norway

Atle Oglend (Contact Author)

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Petter Osmundsen

University of Stavanger ( email )

4036 Stavanger
Norway

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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