Abstract
Whilst some regional energy markets appear to be integrating, modelling the pricing of natural gas exports in an imperfect global spot market remains a difficult task. For the sake of analysis, this paper proposes the expansion of a theoretical global party to party spot gas price bargaining model to capture lagged daily prices of the major competing fuels and values of a global economic indicator in the world stock market price index. Vector autoregressive based tests provide no evidence of cointegration, however tests of exogeneity show that gas prices and gas price changes are primarily influenced by oil prices and oil price changes. Within this framework, it is found that the oil price and oil price changes are influenced significantly by global stock price index values and index value changes and the coal price index values and index value changes. The model put forward is purely for preliminary analysis but it shows potential. All markets need to become larger, more globally integrated, more informationally efficient and mechanisms to arbitrage the various energy markets would need to be established before a final global gas spot price index is possible.
Highlights
Cartel pricing for gas, as suggested by some that support the OPEC oil pricing model, is generally rejected by free market economists
The purpose of this paper is to examine the feasibility of an interim spot benchmark pricing model for natural gas, taking into account a variable that partially reflects supply and demand forces and variables that represent replacement energy sources in an expanded party to party bargaining model
The issues in this study are as follows: Are world stock prices, oil and coal prices and the changes in these prices significantly related to Henry Hub (HH) gas prices and the changes in these prices? Are the specified explanatory variables demonstrated to be exogenous? If the answer to these questions is yes, it is posited that the pricing model could in future become a useful interim benchmark spot price or indicator spot price for natural gas, which may assist in party to party bargaining
Summary
Cartel pricing for gas, as suggested by some that support the OPEC oil pricing model, is generally rejected by free market economists. In Asia (For example Japan) the import price formula is based on a basket of crude oil prices commonly referred to as the Japanese Crude Cocktail (JCC). This is not the case in China, which has provided for lower prices and weaker linkages to oil prices. Eng (2006) builds a case for the adoption by New Zealand of a lower bound Chinese pricing model for LNG imports. These imports may not necessarily be sourced from Australia but the distance from Australia to New Zealand compares to that from Australia to China. At least a spot pricing model can and should be put forward for preliminary analysis
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