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The Global Natural Gas Market: Will Transport Cost Reductions Lead to Lower Prices?

Reduced transportation costs are usually associated with lower import prices, increased trade and price convergence. In this paper we show that lower transport 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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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Markets and Prices; Natural Gas – LNG Infrastructure

JEL Codes:
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
L13 - Oligopoly and Other Imperfect Markets
F18 - Trade and Environment

Keywords: Natural gas, trade, transport costs, price convergence, numerical model, LNG.

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No2-2

Published in Volume 30, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.