If one examines the spectrum of fuels for power generation, in terms of flexibility of use and pollution, then coal is visibly the least flexible and most problematic of fuels, whilst the most flexible is gasoil / diesel, in the middle of the market we have fuel oil and natural gas. In the span of flexibility heavy fuel oil is a commodity which is relatively flexible and in the mid range price wise but potentially the most polluting and is therefore a good average priced fuel on which natural gas can be based. This is the reason why so many natural gas contracts around the world are based on heavy fuel oil or rather on a discount to heavy fuel oil (at around 80% -85% discount of fuel oil). From the seller’s point of view, natural gas is in fact nearly the most comparable to gasoil/diesel in terms of its capabilities, but from the buyer’s point of view since gasoil/diesel is used more for the mobile locomotive market than natural gas, therefore gasoil has greater flexibility and thus can fetch a premium over natural gas (since there is tremendous demand for gasoil and since at the end of the day natural gas cannot readily power a fleet of trucks). The price of gasoil should thus be higher than that of natural gas. Fuel oil is not as attractive as natural gas as it has more imperatives, more maintenance requirements; therefore in principle natural gas should be higher priced than fuel oil. However, fuel oil has the advantage that it is an international traded commodity and therefore it has a premium for this value, whilst natural gas suffers from not yet being internationally traded. LNG should be priced the same as fuel oil or even higher as it is internationally traded and more flexible than fuel oil, but this is not yet the case. Pipelined gas, however, has higher restrictions on its use and marketability and is thus tended to be priced at 80% of fuel oil. Indeed, gasoil can be more readily shipped to its destination than natural gas can, via a large network of oil tankers that can easily bring the fuel on demand to high consumption markets that are continuing to grow such as China. In these regions, natural gas pipelines are also less developed with a large majority of the pipelines feeding the European and US markets. Oil can also be stored easily which enables to implement a national energy policy and enables the greater use thereof during times when prices are lower. In the US, for instance it is possible to store up to 6 months worth of consumption of oil. Natural gas is used to a great degree for heating in the winter (in the northern hemisphere) and for industry as a source of energy or as a feedstock in the chemical and fertilizer industries, whilst again gasoil is used mostly for locomotion. In times of crisis, when the price of oil remains high and that of natural gas is lower per mmbtu, it is often because industry tends to be affected more severally than the use of cars. In addition, the secondary market for oil is more developed than that for natural gas which still relies more on long term contracts. Another important difference between oil and gas is that the oil exporting countries are united by a strong cartel which helps them to maintain prices at a certain level, whereas this is still non existant in the natural gas sector. Of course, natural gas enjoys a significant advantage in it being a more environmentally friendly fuel, and as countries will tend to implement stricter environmental and carbon control laws and taxes, natural gas has the propensity of growing more in importance.
