Is There a Rationale for the Continuing Link to Oil Product Prices in Continental European Long Term Gas Contracts?

This paper examines the rationale for the continuing linkage of European gas prices to oil product prices. With the passage of liberalisation and competition legislation by the EU and national governments, starting in the late 1990s, it was expected that prices would be determined by gas to gas competition, as happened in both North America and the UK in the 1980s and 1990s. However, in the 2000s, North American and UK gas prices regained a more immediate correlation with oil prices, while Continental European prices in long-term contracts have remained (predominantly) linked to oil products. A number of additional questions arising from the linkage between oil and gas prices – in particular whether prices of the two fuels tend towards a natural correlation irrespective of contractual relationships between market players – are also examined. But the specific question which this paper addresses is whether there is still a rationale for gas prices to be largely indexed to oil product prices in European gas contracts and, if so, what is that rationale?

By: Jonathan Stern

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