Effects of North American Shale Gas on the World Natural Gas Market
In this paper, we develop an “OPEC” type of model for the world natural gas market where buyers and sellers (dominant producers and competitive fringe) are connected by a trading network. The market power of a producer depends on its supply capacity, its elasticity of supply, the number of competitors it faces in each market and their supply elasticities. We apply this model to a natural gas trade network based on BP’s Statistical Review of World Energy 2010 major trade flows. We then expand this network by allowing for North American natural gas exports. In our model, strategic interactions of all the producers and consumers in the world natural gas trade network determine the export volumes from North America and their impacts on North American natural gas prices. 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 and hence decreases the incentive of any parties to form a natural gas cartel.