Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89705
Authors: 
Asche, Frank
Oglend, Atle
Osmundsen, Petter
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4503
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.
Subjects: 
oil
natural gas
seasonality
regime switching
demand
capacity
commodity price dynamics
JEL: 
Q31
Q41
Q47
Document Type: 
Working Paper

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