IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_4503.html

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
    as

    Download full text from publisher

    File URL: https://www.ifo.de/DocDL/cesifo1_wp4503.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:aen:journl:2006v27-02-a04 is not listed on IDEAS
    2. Mount, Timothy D. & Ning, Yumei & Cai, Xiaobin, 2006. "Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters," Energy Economics, Elsevier, vol. 28(1), pages 62-80, January.
    3. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    4. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, November.
    5. Asche, Frank & Osmundsen, Petter & Tveteras, Ragnar, 2002. "European market integration for gas? Volume flexibility and political risk," Energy Economics, Elsevier, vol. 24(3), pages 249-265, May.
    6. repec:aen:journl:1993v14-04-a01 is not listed on IDEAS
    7. Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
    8. repec:dau:papers:123456789/1433 is not listed on IDEAS
    9. Ravi Bansal & George Tauchen & Hao Zhou, 2004. "Regime Shifts, Risk Premiums in the Term Structure, and the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 396-409, October.
    10. Siliverstovs, Boriss & L'Hegaret, Guillaume & Neumann, Anne & von Hirschhausen, Christian, 2005. "International market integration for natural gas? A cointegration analysis of prices in Europe, North America and Japan," Energy Economics, Elsevier, vol. 27(4), pages 603-615, July.
    11. Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
    12. Pirrong,Craig, 2012. "Commodity Price Dynamics," Cambridge Books, Cambridge University Press, number 9780521195898, November.
    13. repec:aen:journl:2006v27-02-a02 is not listed on IDEAS
    14. Asche, Frank & Gjolberg, Ole & Volker, Teresa, 2003. "Price relationships in the petroleum market: an analysis of crude oil and refined product prices," Energy Economics, Elsevier, vol. 25(3), pages 289-301, May.
    15. Panagiotidis, Theodore & Rutledge, Emilie, 2007. "Oil and gas markets in the UK: Evidence from a cointegrating approach," Energy Economics, Elsevier, vol. 29(2), pages 329-347, March.
    16. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-182, April.
    17. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    18. Erdős, Péter, 2012. "Have oil and gas prices got separated?," Energy Policy, Elsevier, vol. 49(C), pages 707-718.
    19. 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.
    20. repec:aen:journl:2008v29-03-a02 is not listed on IDEAS
    21. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Asche, Frank & Misund, Bård & Sikveland, Marius, 2013. "The relationship between spot and contract gas prices in Europe," Energy Economics, Elsevier, vol. 38(C), pages 212-217.
    3. Christian Growitsch & Marcus Stronzik & Rabindra Nepal, 2015. "Price Convergence and Information Efficiency in German Natural Gas Markets," German Economic Review, Verein für Socialpolitik, vol. 16(1), pages 87-103, February.
    4. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    5. Asche, Frank & Oglend, Atle & Osmundsen, Petter, 2012. "Gas versus oil prices the impact of shale gas," Energy Policy, Elsevier, vol. 47(C), pages 117-124.
    6. Andrew Ang & Geert Bekaert, 2004. "The term structure of real rates and expected inflation," Proceedings, Federal Reserve Bank of San Francisco, issue mar.
    7. Hudák, Milan & Čermáková, Klára & Kadeřábková, Božena & Popescu, Irina Alina & Balsalobre-Lorente, Daniel, 2026. "From fragmentation to integration: Gas market convergence in Central and Eastern Europe in the aftermath of the EU energy crisis," Energy Policy, Elsevier, vol. 208(C).
    8. Dahl, Roy Endre & Ogland, Atle & Osmundsen, Petter & Sikveland, Marius, 2011. "Are oil and natural gas going separate ways in the UK? Cointegration tests with Structural shifts," UiS Working Papers in Economics and Finance 2011/5, University of Stavanger.
    9. Oglend, Atle & Kleppe, Tore Selland & Osmundsen, Petter, 2016. "Trade with endogenous transportation costs: The case of liquefied natural gas," Energy Economics, Elsevier, vol. 59(C), pages 138-148.
    10. ZHU Xiaoneng & Shahidur RAHMAN, 2009. "A Regime Switching Macro-finance Model of the Term Structure," Economic Growth Centre Working Paper Series 0901, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    11. Carlo Lucheroni, 2012. "A hybrid SETARX model for spikes in tight electricity markets," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 22(1), pages 13-49.
    12. Atle Oglend & Petter Osmundsen & Tore Selland Kleppe, 2015. "Trade with Endogenous Transportation Costs: The Value of LNG Exports," CESifo Working Paper Series 5222, CESifo.
    13. Mari, Carlo & Cananà, Lucianna, 2012. "Markov switching of the electricity supply curve and power prices dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(4), pages 1481-1488.
    14. Olivier Massol & Albert Banal-Estanol, 2018. "Market Power and Spatial Arbitrage between Interconnected Gas Hubs," The Energy Journal, , vol. 39(2_suppl), pages 67-96, December.
    15. Dukhanina, Ekaterina & Massol, Olivier & Lévêque, François, 2019. "Policy measures targeting a more integrated gas market: Impact of a merger of two trading zones on prices and arbitrage activity in France," Energy Policy, Elsevier, vol. 132(C), pages 583-593.
    16. Marjan Petreski, 2010. "An Overhaul of a Doctrine: Has Inflation Targeting Opened a New Era in Developing-country Peggers?," FIW Working Paper series 057, FIW.
    17. Karakatsani, Nektaria V. & Bunn, Derek W., 2008. "Forecasting electricity prices: The impact of fundamentals and time-varying coefficients," International Journal of Forecasting, Elsevier, vol. 24(4), pages 764-785.
    18. Gao, Huan & Mamon, Rogemar & Liu, Xiaoming & Tenyakov, Anton, 2015. "Mortality modelling with regime-switching for the valuation of a guaranteed annuity option," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 108-120.
    19. Bulkley, George & Giordani, Paolo, 2011. "Structural breaks, parameter uncertainty, and term structure puzzles," Journal of Financial Economics, Elsevier, vol. 102(1), pages 222-232, October.
    20. Umut Ugurlu & Ilkay Oksuz & Oktay Tas, 2018. "Electricity Price Forecasting Using Recurrent Neural Networks," Energies, MDPI, vol. 11(5), pages 1-23, May.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4503. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.