NG pricing is unique in the world of global commodity sales in that it has two different forms of competition that impact its price. As a result, the standard models for commodity price formation do not explain the actual behavior of NG market prices. The lack of understanding of this unique phenomenon can lead to policies that undermine the Pareto optimality criteria and further raise the possibility of market failure in the NG sector.

As described in Chapter 3, there are two different forms of competition in NG markets, that is, interfuel or gas-on-substitute and direct GOG competition. No other global commodity has this duality in price formation. The existence of this duality results in what I call the hybridization of NG spot hub prices. Without hybridization, the market-clearing price would be different in terms of both price level and volatility. Hybridization causes a deviation from the hypothetical pricing pattern of free-market prices that would be set by only GOG competition, the traditional form of price setting for most commodities. Hybridization is a fundamental of the NG market that will stay in place as long as NG competes in energy markets with other carbon fuels. This means that the NG industry has to live with hybridization, like it or not. This leads to questions about the relationship between the quality of NG pricing and the Pareto optimality criteria. To make this comparison, it is necessary to understand how the mechanisms of price hybridization work.

In Chapter 3, I explained the existence of a price envelope for NG based on oil prices as the ceiling and coal prices as the floor and how this price envelope is one of the factors of hybridization. In Chapter 2, I described the other factor of direct hybridization that comes from the impact of term contracts acting as a center of gravity for the movement of hub prices. OPE is an influence factor on LTCs and therefore indirectly on hub prices. Though its role has decreased in Europe, in other parts of the world, except for the US, it still has a strong impact on regional hub prices. This is not true for the United States because LTCs do not have any significant proliferation here.