IDEAS home Printed from https://ideas.repec.org/p/cam/camdae/0539.html
   My bibliography  Save this paper

Long-term vs. Short-term Contracts; A European perspective on natural gas

Author

Listed:
  • Neuhoff, K.
  • von Hirschhausen, C.

Abstract

This paper analyses the economics of long-term gas contracts under changing institutional conditions, mainly gas sector liberalisation. The paper is motivated by the increasingly tense debate in continental Europe, UK and the US on the security of long-term gas supply. We discuss the main issues regarding long-term contracts, i.e. the changing role of the flexibility clause, the effect of abandoning the destination clause, and the strategic behaviour of producers between long-term sales and spot-sales. The literature suggests consumers and producers benefit from risk hedging through long-term contracts. Furthermore long-term contracts may reduce exercise of market power. This was argued to benefit consumers at the ‘expense’ of producers’ profits. Our analysis shows if the long-run demand elasticity is significantly lower than the short-run elasticity, both strategic producers and consumers benefit from lower prices and larger market volume. Some policy implications of the findings are also discussed.

Suggested Citation

  • Neuhoff, K. & von Hirschhausen, C., 2005. "Long-term vs. Short-term Contracts; A European perspective on natural gas," Cambridge Working Papers in Economics 0539, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0539
    Note: EPRG 05
    as

    Download full text from publisher

    File URL: https://www.jbs.cam.ac.uk/wp-content/uploads/2023/12/eprg-wp0505.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    2. Mohammed A. Al-Sahlawi, 1989. "The Demand for Natural Gas: A Survey of Price and Income Elasticities," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 77-90.
    3. Javier Estrada & Ole Fugleberg, 1989. "Price Elasticities of Natural Gas Demand in France and West Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 77-90.
    4. Masten, Scott E, 1988. "Minimum Bill Contracts: Theory and Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 85-97, September.
    5. Keith J. Crocker & Scott E. Masten, 1988. "Mitigating Contractual Hazards: Unilateral Options and Contract Length," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 327-343, Autumn.
    6. repec:bla:jfinan:v:44:y:1989:i:4:p:981-1010 is not listed on IDEAS
    7. Ken Costello & Hillard G. Huntington & James F. Wilson, 2005. "After the Natural Gas Bubble: An Economic Evaluation of the Recent U.S. National Petroleum Council Study," The Energy Journal, , vol. 26(2), pages 89-109, April.
    8. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-1093, December.
    9. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    10. Mulherin, J Harold, 1986. "Complexity in Long-term Contracts: An Analysis of Natural Gas Contractual Provisions," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 105-117, Spring.
    11. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hauteclocque, Adrien de & Glachant, Jean-Michel, 2009. "Long-term energy supply contracts in European competition policy: Fuzzy not crazy," Energy Policy, Elsevier, vol. 37(12), pages 5399-5407, December.
    2. repec:diw:diwwpp:dp552 is not listed on IDEAS
    3. Christian Hirschhausen & Anne Neumann, 2008. "Long-Term Contracts and Asset Specificity Revisited: An Empirical Analysis of Producer–Importer Relations in the Natural Gas Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(2), pages 131-143, March.
    4. Anne Neumann & Sophia Rüster & Christian von Hirschhausen, 2015. "Long-Term Contracts in the Natural Gas Industry: Literature Survey and Data on 426 Contracts (1965-2014)," Data Documentation 77, DIW Berlin, German Institute for Economic Research.
    5. Adrien de Hauteclocque & Jean-Michel Glachant, 2011. "Long-term Contracts and Competition Policy in European Energy Markets," Chapters, in: Jean-Michel Glachant & Dominique Finon & Adrien de Hauteclocque (ed.), Competition, Contracts and Electricity Markets, chapter 9, Edward Elgar Publishing.
    6. Glachant, Jean-Michel & Hallack, Michelle, 2009. "Take-or-pay contract robustness: A three step story told by the Brazil-Bolivia gas case?," Energy Policy, Elsevier, vol. 37(2), pages 651-657, February.
    7. Chyong, C-K., 2019. "Challenges to the Future of European Single Market in Natural Gas," Cambridge Working Papers in Economics 1918, Faculty of Economics, University of Cambridge.
    8. Joseph C. Mullin & Wallace P. Mullin, 1996. "United States Steel's Acquisition of the Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance?," NBER Working Papers 5662, National Bureau of Economic Research, Inc.
    9. Chi-Kong Chyong, 2015. "Markets and long-term contracts: The case of Russian gas supplies to Europe," Cambridge Working Papers in Economics 1542, Faculty of Economics, University of Cambridge.
    10. repec:dau:papers:123456789/5372 is not listed on IDEAS
    11. Yuli Radev, 2014. "Natural gas trading in Europe in terms of market disequilibrium," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 3-18,19-33.
    12. Stéphane Saussier, 1998. "La durée des contrats interentreprises : une analyse empirique," Économie et Prévision, Programme National Persée, vol. 135(4), pages 137-146.
    13. López-Bayón, Susana & González-Díaz, Manuel, 2010. "Indefinite contract duration: Evidence from electronics subcontracting," International Review of Law and Economics, Elsevier, vol. 30(2), pages 145-159, June.
    14. Chi Kong Chyong, 2019. "European Natural Gas Markets: Taking Stock and Looking Forward," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(1), pages 89-109, August.
    15. Luc Baumstark & Claude Ménard & William Roy & Anne Yvrande-Billon, 2005. "Modes de gestion et efficience des opérateurs dans le secteur des transports urbains de personnes," Post-Print halshs-00103116, HAL.
    16. Kosnik, Lea & Lange, Ian, 2011. "Contract renegotiation and rent re-distribution: Who gets raked over the coals?," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 155-165, September.
    17. Navajas, Fernando H., 2008. "Infrastructure integration and incomplete contracts: natural gas in the Southern Cone," MPRA Paper 31025, University Library of Munich, Germany.
    18. Chi Kong Chyong & David M Reiner & Dhruvak Aggarwal, 2023. "Market Power and Long-term Gas Contracts: The Case of Gazprom in Central and Eastern European Gas Markets," The Energy Journal, , vol. 44(1), pages 55-74, January.
    19. M'Hand Farès & Stéphane Saussier, 2002. "Coûts de transaction et contrats incomplets," Revue Française d'Économie, Programme National Persée, vol. 16(3), pages 193-230.
    20. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.
    21. Guych Nuryyev & Tomasz Korol & Ilia Tetin, 2021. "Hold-Up Problems in International Gas Trade: A Case Study," Energies, MDPI, vol. 14(16), pages 1-16, August.
    22. Koss, P. A. & Eaton, B. Curtis, 1997. "Co-specific investments, hold-up and self-enforcing contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 32(3), pages 457-470, March.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0539. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jake Dyer (email available below). General contact details of provider: https://www.econ.cam.ac.uk/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.