That's the only way I see it happening.

Obviously the average world prices cannot be entirely decoupled, because it only requires one partial substitute that can be shifted from one region to another to couple the average prices over time. But if only one of two partial substitutes are transportable between global regions, there could be what looks like decoupling within a given region, as the regional BTU_oil/BTU_gas ratio departs from historical patterns.

In the short and medium term, decoupling between oil and gas happens in a given region because the infrastructure to permit physical arbitrage between a lower price and a higher price gas region is not in place. And that is obviously not going to lead to long-term decoupling ... given confidence in the future supply of natural gas, and given a sustained arbitrage opportunity, that infrastructure will eventually get built.

I think more likely people are seeing the effects of the price volatility that comes with the loss of a buffer production capacity ... I think its probably a direct result from queuing theory that if there is not stabilizing buffer in either market, there will not only be a dramatic increase in short term price volatility, but that within the short-term, the price swings in the two markets will not be highly correlated.

Stated (slightly) more simply, as it becomes more common for the spot price in particular regions to swing more widely around the medium term global price trend ...

... the coupling of global oil and gas medium term price trends tells us less and less about the ratio of prices in a particular pair of regional spot markets.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.