This means that the difference in the price of these fuels on a BTU-equivalent basis should be small. If the difference is large, massive demand increases for the cheaper fuel and massive demand declines for the more expensive one would occur. These shifts in demand would increase the price of the cheaper fuel and decrease the price of the more expensive fuel, thereby automatically reducing the price discrepancy. This idea is supported by sound economic theory, but in practice the world is more complicated than suggested in the preceding analysis. In the last few years it has become quite clear that oil and natural gas are not close substitutes in many applications.
Natural gas can substitute for petroleum based products only in limited cases.
Natural gas can easily replace fuel oil, and vice versa, in many industrial process applications. The two are not substitutes in the short run, however, for most residential applications. For example, unless a customer has a dual-fueled vehicle, which very few people do, he or she cannot fill his or her automobile gas tank with natural gas instead of gasoline when natural gas prices decline. Similarly, a customer cannot burn gasoline in his or her furnace when gasoline prices decline to low levels, such as those seen today. Nor can the customer switch to fuel oil without incurring noticeable equipment costs.