An Imperfectly Competitive Model of the World Natural Gas Market

Abstract

In this paper we develop a model of global natural gas trade under imperfect competition where buyers and sellers (producers) are connected by a trading network. The market power of a producer depends on her supply capacity, her access to markets and the number of competitors she faces in each market. We apply this model to a natural gas trade network formed by using BP’s Statistical Review of 2010 major trade flows. Later, we change model parameters exogenously to analyze various policy scenarios. 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 shale gas development in North America reduces natural gas producers’ market power all around the world.