Is it all oil?

After opening up of the Interconnector, the liberalized UK natural gas market and the regulated Continental gas markets became physically integrated. The oil-linked Continental gas price became dominant, due to both the large volume of the Continental market and to the fact that the significant call options embedded in the complex take-or-pay contracts make these contracts the marginal source of supply. However, in an interim period after deregulation of the UK gas market (1995) and the opening up of the Interconnector (1998) the UK gas market had neither government price regulation nor a physical Continental gas linkage. We use this period which for natural gas markets displays an unusual combination of deregulation and autarky as a natural experiment to explore if decoupling of natural gas prices from prices of other energy commodities, such as oil and electricity, took place. Using monthly price data, we find a highly integrated market where wholesale demand seems to be for energy rather than a specific energy source.