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The Impact of Securing Alternative Energy Sources on Russian-European Natural Gas Pricing

Abstract:
This paper examines the effects of procuring alternative sources of natural gas on Russian pricing in Europe. With the increasing presence of LNG import capability in European ports, this topic is growing in importance, especially for European policy makers. Theoretical results, stemming from an asymmetric Nash Bargaining model, suggest that Russian prices decrease as dependency on Russian gas decreases. The empirical results, obtained from the estimation of a correlated random effects model, corroborate this stipulation by finding a positive relationship between Russian pricing and average dependency on Russian supplied gas. These findings explain the recent phenomenon experienced in the Baltic Region where the presence of an LNG import terminal in Lithuania has secured access to non-Russian suppliers of gas and decreased prices from Gazprom.

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Energy Specializations: Natural Gas – Imports and Exports; Natural Gas – Markets and Prices; Energy Modeling – Energy Data, Modeling, and Policy Analysis

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

Keywords: Natural Gas Pricing, Asymmetric Nash Bargaining, Game Theory, Outside Options

DOI: 10.5547/01956574.39.2.nhin

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Published in Volume 39, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.