We currently consume one thousand barrels of crude oil in each second of every day. It is by far the most important energy source used across the globe. Oil is used for heating, for electricity generation and transport, with approximately 95% of all global transport being dependent on it as a fuel. In addition, oil is used for making fertilizers and plastics. It is also the benchmark by which other energy sources are measured. We talk of ‘barrels of oil equivalent’ (BOE) and the prices of other fuels such as coal and natural gas have been historically strongly related to it. This can be clearly seen on the chart below which shows U.S. oil, gas and coal prices between 1989 and 2008.

Source: Alexa Capital

But it seems unintuitive that this relationships still exists as oil’s importance has been declining for fifty years and has different uses to either coal or gas. In 1973 over 46% of total primary energy supply came from oil. Today that number is 31%. This decline is much starker when one looks at power generation. In 1973, close to 25% of all power generated was with oil. Today that is 5% and in most Western countries that figure is below 1%. Most of this gap has been taken up by natural gas which is used today to generate nearly a quarter of all global electricity. And the major short-term substitute for gas is not oil but coal and as a result there is a clear relationship between their prices but if you look at the U.S. the relationship between oil and gas and oil and coal since 2008  seems to have broken down (see chart below).

This came about largely because of shale gas which has caused gas prices to fall in the U.S. and a move from more expensive coal to cheaper gas by the utilities. The result is that since 2009 there has been a 10% decrease in coal usage by American utilities while we have seen a 22% increase in gas usage.Thankfully for US coal producers they have been able to export to Europe which offered better prices thanks to its higher gas prices.  This sheltered the U.S. coal price for a while but it has ultimately continued to fall due to a glut of coal across the world. Then came the oil price crash and gas prices have actually come up since with coal continuing on it multi-year downward path. So in the U.S. it could well be that the relationship between oil and the other fossil fuels has finally been broken?

Source: Alexa Capital

This is not the case in Europe as gas contracts are tied to oil prices (usually with a six month lag). And coal has been cheaper in recent years than gas (as can be seen below) and so there has been a move to coal across the continent. None more so than Germany which between 2009 and 2014  saw a 4% increase in coal usage for power production and a 28% decrease in gas demand.

Source: Alexa Capital

The question I ask is why would one even tie the price of a commodity such as gas to another product which is not a real substitute….Might have made sense 40 years ago but today the gas price needs to be tied, if at all, to the power price or even coal.


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