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The Merits of Dual Pricing of Russian Natural Gas

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  • David G. Tarr
  • Peter D. Thomson

Abstract

Our analysis reveals that, from Russia's perspective, there is no economic rationale to unify the price of natural gas it sells domestically and in Europe. We argue that pipelines allow Gazprom to segment the Russian market from the European (including Turkey) market and that Russia has market power in the European market. If Russia were to fail to exploit this market power in its European market, by selling its natural gas to Europe at only full long-run marginal cost plus transportation costs, Russia would lose between $5 billion and $7.5 billion per year (almost two per cent of its GDP). If, instead, Russia were to raise its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run - adjustment costs that cannot be justified on the basis of comparative advantage. We estimate that the efficient world price would be achieved if Gazprom were to employ its optimal 'two-part tariff'. The optimal two-part tariff would double Gazprom's annual profits in Europe, but it involves significant long-term risks for Gazprom of lost market share. Copyright 2004 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 27 (2004)
Issue (Month): 8 (08)
Pages: 1173-1194

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Handle: RePEc:bla:worlde:v:27:y:2004:i:8:p:1173-1194

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Cited by:
  1. Sergey Chernavsky & Oleg Eismont, 2009. "Is Gas Cartel's Profitable for Russia? (A Case of European Gas Market)," Journal of the New Economic Association, New Economic Association, issue 1-2, pages 127-149.
  2. Eirik Lund Sagen & Marina Tsygankova, 2006. "Russian Natural Gas Exports to Europe. Effects of Russian gas market reforms and the rising market power of Gazprom," Discussion Papers 445, Research Department of Statistics Norway.
  3. Tsygankova, Marina, 2010. "When is a break-up of Gazprom good for Russia?," Energy Economics, Elsevier, vol. 32(4), pages 908-917, July.
  4. Tarr, David G., 2012. "Putting services and foreign direct investment with endogenous productivity effects in computable general equilibrium models," Policy Research Working Paper Series 6012, The World Bank.
  5. Marina Tsygankova, 2007. "When is Mighty Gazprom Good for Russia?," Discussion Papers 526, Research Department of Statistics Norway.
  6. Dominique Finon & Catherine Locatelli, 2008. "Russian and European gas interdependence. Can market forces balance out geopolitics?," Post-Print halshs-00129618, HAL.
  7. repec:hal:cepnwp:halshs-00607420 is not listed on IDEAS
  8. Marina Tsygankova, 2007. "The export of Russian gas to Europe: breaking up the monopoly of Gazprom," Discussion Papers 494, Research Department of Statistics Norway.
  9. Sadek Boussena & Catherine Locatelli, 2011. "La sécurité, question clé des relations gazières entre l'UE et la Russie," Post-Print halshs-00625223, HAL.
  10. Spanjer, Aldo, 2007. "Russian gas price reform and the EU-Russia gas relationship: Incentives, consequences and European security of supply," Energy Policy, Elsevier, vol. 35(5), pages 2889-2898, May.
  11. repec:hal:wpaper:halshs-00607420 is not listed on IDEAS
  12. Lunden, Lars Petter & Fjaertoft, Daniel & Overland, Indra & Prachakova, Alesia, 2013. "Gazprom vs. other Russian gas producers: The evolution of the Russian gas sector," Energy Policy, Elsevier, vol. 61(C), pages 663-670.

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