The Decoupling of Oil and Gas Prices

Energy forms are not created equal. Gasoline and diesel are great fuels for transportation, and at the moment there are few viable alternatives. Coal, on the other hand, is just dandy for generating electricity and smelting metals. Natural gas is terrific for heating homes, powering small electricity-generating turbines and manufacturing fertilizers and petrochemicals.

Because of their different applications and their different energy densities, hydrocarbons have different relative prices. And until recently, they were priced in a band which reflected their relative values. That band is now falling apart.

The chart shows the price of oil compared to that of natural gas in North America. Until recently, natural gas prices traded in a fairly close ratio to the price of oil. Depending on the state of the industry, the ratios formed a band which ranged from 10:1 to 6:1. Here