Is there a rationale for the continuing link to oil product prices in continental European long‐term gas contracts?

Abstract

Purpose

The purpose of this paper is to investigate the continuing justification for linking the prices of European gas to those oil products.

Design/methodology/approach

The paper uses an analytic‐deductive approach supported by relevant analysis of data over a period of two decades.

Findings

Statistical analysis of the end‐uses of gas and oil products over the past two decades reveal that, with few exceptions, use of oil is increasing confined to transportation while gas is a utility fuel used to generate heat and power. The ability of end‐users to substitute oil products for gas – the principal justification for price linkage – has substantially diminished over the past two decades, and this trend is continuing. The implication of these findings is that nearly 20 percent of Europe's energy supplies are priced inappropriately with reference to a fuel which has little relevance to the supply/demand dynamics of natural gas. At levels of oil prices seen since 2003, this has significantly negative consequences for consumers. An important qualification to these findings is that in markets where prices have been set by gas to gas competition for many years – the UK and North America – a long‐term “natural correlation” between gas and oil prices has been observed.

Originality/value

The paper raises the important question facing European gas stakeholders and asks whether to remain with oil‐linked prices or move to spot market prices created at hubs in North West Europe.

Citation

Stern, J.P. (2007), "Is there a rationale for the continuing link to oil product prices in continental European long‐term gas contracts?", International Journal of Energy Sector Management, Vol. 1 No. 3, pp. 221-239. https://doi.org/10.1108/17506220710821116