The Decoupling of Oil and Natural Gas Prices and Implications for Korean Industries

The prices of crude oil and natural gas have long demonstrated a relationship in which their prices move together, as they are both indus­trial resources and economic substitutes. This relationship owes to the pricing mechanism at work in the natural gas market, in which the price of gas is linked to the price of oil in order to protect its price competitiveness. For the natural gas industry, price competi­tiveness is crucial because in commercial appli­cations, it is more difficult to utilize natural gas than crude oil. For one, natural gas is less en­ergy dense than crude oil, making it inherently less economical to transport and store. Thus, the natural gas industry has adopted a pricing mechanism that connects the price of gas to oil and sets them at a lower rate to ensure continued price competitiveness. However, since the late 2000s, the price cor­relation between crude oil and natural gas has weakened. One of the main causes of this de­coupling phenomenon is the increase in shale gas production in the United States. The pro­duction of shale gas in the US has increased global supply, affecting natural gas prices. In addition, changes to the contract method for natural gas have fostered competition within the natural gas market, further weakening its linkages to oil prices. As oil and gas are two resources that fuel global industry, their prices can significantly impact the cost structure of firms in various industries. And so the newly-independent pricing mechanisms being observed in the natural gas market carry significant implica­tions. In this paper we investigate the causes of the changes in the price relationship between these two resources and describe their potential impacts on major industries in Korea.