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Is It All Oil?

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  • Frank Asche
  • Petter Osmundsen
  • Maria Sandsmark

Abstract

After opening up of the Interconnector, the liberalized UK natural gas market and the regulated Continental gas markets became physically integrated. The oil-linked Continental gas price became dominant, due to both the large volume of the Continental market and to the fact that the significant call options embedded in the complex take-or-pay contracts make these contracts the marginal source of supply. However, in an interim period – after deregulation of the UK gas market (1995) and the opening up of the Interconnector (1998) – the UK gas market had neither government price regulation nor a physical Continental gas linkage. We use this period – which for natural gas markets displays an unusual combination of deregulation and autarky – as a natural experiment to explore if decoupling of natural gas prices from prices of other energy commodities, such as oil and electricity, took place. Using monthly price data, we find a highly integrated market where wholesale demand seems to be for energy rather than a specific energy source.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1401.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1401

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Keywords: energy markets; price interlinkages; cointegration analysis;

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References

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  1. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, Elsevier, vol. 63(1), pages 7-36, July.
  2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  3. Doane, Michael J & Spulber, Daniel F, 1994. "Open Access and the Evolution of the U.S. Spot Market for Natural Gas," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 37(2), pages 477-517, October.
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  5. De Vany, Arthur & Walls, W. David, 1993. "Pipeline Access and Market Integration in the Natural Gas Industry: Evidence from Cointegration Tests," University of California Transportation Center, Working Papers qt8368m144, University of California Transportation Center.
  6. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, Elsevier, vol. 60(1-2), pages 203-233.
  7. Arthur De Vany & W. David Walls, 1994. "Open Access And The Emergence Of A Competitive Natural Gas Market," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 77-96, 04.
  8. De Vany, Arthur S. & Walls, W. David, 1999. "Cointegration analysis of spot electricity prices: insights on transmission efficiency in the western US," Energy Economics, Elsevier, Elsevier, vol. 21(5), pages 435-448, October.
  9. Gjolberg, Ole & Johnsen, Thore, 1999. "Risk management in the oil industry: can information on long-run equilibrium prices be utilized?," Energy Economics, Elsevier, Elsevier, vol. 21(6), pages 517-527, December.
  10. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Péter Erdős & Mihály Ormos, 2012. "Natural Gas Prices on Three Continents," Energies, MDPI, Open Access Journal, vol. 5(10), pages 4040-4056, October.

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