Spatial Price Equilibrium in the World Natural Gas Market

Abstract

Characteristic for the world natural gas market is that the markets in different continents are not completely integrated. In some cases, this leads to exceptionally large price differences. There are two reasons for this; first the technical difficulties related to shipping natural gas, second the pricing mechanism of the natural gas market. The purpose of this thesis is to use the Spatial Price Equilibrium (SPE) theory to describe the world market for natural gas and to predict how it will react to the recent disturbances in trade following the Russian invasion of Ukraine in 2022. We include data from all countries in the world with an import or export exceeding 10 000 terajoule of natural gas into a SPE model implemented in the GAMS programming language. The result from the model tells what world gas trade flows would be if arbitrage possibilities were utilized and find that it partially differs from real trade flows. Thus, our thesis concludes that the world market for natural gas is only partially integrated, which is also in line with the current economic research in the field. Using the model, a scenario is simulated where sanctions limit trade of Russian gas. In this scenario Europe will experience higher prices and less consumption of gas. In the long run given that the capacity of shipping LNG is increased, Europe will compensate with imports from other sources and the price and consumption levels will return to normal, while Russia will also find new export markets for its gas and return towards, but not quite reach, pre-sanctions export levels.