Modeling competition in natural gas markets
Hartley, Peter R.
Doctor of Philosophy
This dissertation consists of three chapters; each models competition in natural gas markets. These models provide insight into interactions between changes in market conditions/policies and market players’ strategic behavior. In all three chapters, we apply our models to a natural gas trade network formed by using BP’s Statistical Review of World Energy 2010 major trade flows. In the first chapter, we develop a model for the world natural gas market where buyers and sellers are connected by a trading network. Each natural gas producer is a Cournot player with a fixed supply capacity. Each of them is also connected to a unique set of importing markets. We show that this constrained noncooperative Cournot game is a potential game and its potential function has a unique maximizer. In the scenario analysis, we find that any exogenous change affecting Europe also has an effect in the Asia Pacific. The reason is that two big producers, Russia and the Middle East, are connected to both markets. We also find that a collusive agreement between Russia and the Middle East leads them to specialize in supply to markets based on their marginal costs of exporting natural gas. The second chapter is devoted to analyzing the impacts of North American shale gas on the world natural gas market. To better represent the North American natural gas market, this chapter also allows for perfect competition in that market. We find that North America exports natural gas when its supply curve is highly elastic and hence the domestic price impact of its exports is very small. Even so, the price impacts on the importing markets are substantial. We also find that shale gas development in North America decreases dominant producers’ market power elsewhere in the world and hence decreases the incentive of any parties to form a natural gas cartel. In the third chapter, we relax the assumption of fixed supply capacities and allow for natural gas producers to invest in their supply capacities. We assume a two period model with no uncertainty and show that there is a unique Cournot-Nash equilibrium and the open-loop Cournot-Nash equilibrium and closed-loop Cournot-Nash equilibrium investments coincide.
Natural gas markets; Cournot equilibrium; Potential game