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The Global Natural Gas Market. Will transport cost reductions lead to lower prices?

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  • Knut Einar Rosendahl
  • Eirik Lund Sagen

    ()
    (Statistics Norway)

Abstract

Reduced transportation costs are usually associated with lower import prices, increased trade and price convergence. In this paper we show that the lower costs can actually lead to higher import prices in some regions, and price divergence between import regions. Using both a general theoretical approach and a numerical model of the global natural gas market, we demonstrate that the price effect from transport cost reductions depend on the relative distances between regional markets, the choice of transport technology, and supply and demand responsiveness in the different markets. Our numerical results suggest that European consumers would generally be better off if pipeline costs are reduced, while North American consumers would be better off if LNG costs are reduced.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 523.

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Date of creation: Nov 2007
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Handle: RePEc:ssb:dispap:523

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Keywords: Natural gas; trade; transport costs; price convergence; numerical model;

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References

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  1. Gabriel, Steven A. & Zhuang, Jifang & Kiet, Supat, 2005. "A large-scale linear complementarity model of the North American natural gas market," Energy Economics, Elsevier, vol. 27(4), pages 639-665, July.
  2. Asche, Frank & Osmundsen, Petter & Tveteras, Ragnar, 2002. "European market integration for gas? Volume flexibility and political risk," Energy Economics, Elsevier, vol. 24(3), pages 249-265, May.
  3. Guillaume L¿Hégaret & Boriss Siliverstovs & Anne Neumann & Christian von Hirschhausen, 2003. "International Market Integration for Natural Gas?: A Cointegration Analysis of Prices in Europe, North America and Japan," Discussion Papers of DIW Berlin 393, DIW Berlin, German Institute for Economic Research.
  4. Golombec, R. & Gjelsvik, E. & Knut, E. & Rosendahl, E., 1996. "Increased Competition on the Supply Side on the Western European Natural Gas Merket," Memorandum 11/1996, Oslo University, Department of Economics.
  5. Serletis, Apostolos & Herbert, John, 1999. "The message in North American energy prices," Energy Economics, Elsevier, vol. 21(5), pages 471-483, October.
  6. Finn Roar Aune & Solveig Glomsrød & Lars Lindholt & Knut Einar Rosendahl, 2005. "Are high oil prices profitable for OPEC in the long run?," Discussion Papers 416, Research Department of Statistics Norway.
  7. Mads Greaker & Eirik Lund Sagen, 2004. "Explaining experience curves for LNG liquefaction costs: Competition matter more than learning," Discussion Papers 393, Research Department of Statistics Norway.
  8. Marmer, Vadim & Shapiro, Dmitry & MacAvoy, Paul, 2007. "Bottlenecks in regional markets for natural gas transmission services," Energy Economics, Elsevier, vol. 29(1), pages 37-45, January.
  9. Keizo Mizuno & Testuya Shinkai, 2006. "Delegating Infrastructure Projects with Open Access," Discussion Paper Series 28, School of Economics, Kwansei Gakuin University, revised Jan 2006.
  10. Micola, Augusto Ruperez & Bunn, Derek W., 2007. "Two markets and a weak link," Energy Economics, Elsevier, vol. 29(1), pages 79-93, January.
  11. 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 of DIW Berlin 597, DIW Berlin, German Institute for Economic Research.
  12. Maroeska G. Boots, Fieke A.M. Rijkers and Benjamin F. Hobbs, 2004. "Trading in the Downstream European Gas Market: A Successive Oligopoly Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-102.
  13. Cremer, Helmuth & Gasmi, Farid & Laffont, Jean-Jacques, 2003. "Access to Pipelines in Competitive Gas Markets," Journal of Regulatory Economics, Springer, vol. 24(1), pages 5-33, July.
  14. Robinson, Terry, 2007. "Have European gas prices converged?," Energy Policy, Elsevier, vol. 35(4), pages 2347-2351, April.
  15. Rolf Golombek & Eystein Gjelsvik & Knut Einar Rosendahl, 1995. "Effects of Liberalizing the Natural Gas Markets in Western Europe," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 85-112.
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Citations

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Cited by:
  1. Finn Roar Aune & Gang Liu & Knut Einar Rosendahl & Eirik Lund Sagen, 2009. "Subsidising carbon capture. Effects on energy prices and market shares in the power market," Discussion Papers 595, Research Department of Statistics Norway.
  2. Cohen, Gail & Joutz, Frederick & Loungani, Prakash, 2011. "Measuring energy security: Trends in the diversification of oil and natural gas supplies," Energy Policy, Elsevier, vol. 39(9), pages 4860-4869, September.
  3. Aune, Finn Roar & Mohn, Klaus & Osmundsen, Petter & Rosendahl, Knut Einar, 2009. "Financial market pressures, tacit collusion and oil price formation," UiS Working Papers in Economics and Finance 2009/14, University of Stavanger.
  4. Finn Roar Aune & Knut Einar Rosendahl & Eirik Lund Sagen, 2008. "Globalisation of natural gas markets – effects on prices and trade patterns," Discussion Papers 559, Research Department of Statistics Norway.
  5. Finn Roar Aune & Klaus Mohn & Petter Osmundsen & Knut Einar Rosendahl, 2007. "Industry restructuring, OPEC response – and oil price formation," Discussion Papers 511, Research Department of Statistics Norway.
  6. Prakash Loungani & Frederick L. Joutz & Gail Cohen, 2011. "Measuring Energy Security," IMF Working Papers 11/39, International Monetary Fund.
  7. Steve A. Gabriel & Knut Einar Rosendahl & Ruud G. Egging & Hakob Avetisyan & Sauleh Siddiqui, 2010. "Cartelization in gas markets. Studying the potential for a “Gas OPEC”," Discussion Papers 638, Research Department of Statistics Norway.
  8. Massol, Olivier & Tchung-Ming, Stéphane, 2010. "Cooperation among liquefied natural gas suppliers: Is rationalization the sole objective?," Energy Economics, Elsevier, vol. 32(4), pages 933-947, July.
  9. Lochner, Stefan & Dieckhoener, Caroline, 2008. "Analyse von Grenzkostenpreisen im Europaeischen Gasmarkt," EWI Working Papers 2008-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln.

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