Abstract: |
In the course of 2006, Gazprom sharply increased gas prices for Ukraine,
Belarus, Georgia and Moldova. This paper assesses (i) to what extent Europe is
vulnerable to similar use of market power by Russia, and (ii) to what extent
the construction of strategic gas storage could help Europe to reduce its
vulnerability. The European market for imported gas is described by
differentiated Cournot competition between Russia and other – potentially more
reliable – suppliers, in particular LNG imports. The results show that Russian
market power is limited, because demand is not completely inelastic even in
the short run. Moreover, if Russia’s unreliability increases (or if European
short-run demand elasticity decreases) Russia gives away more and more of its
expected profits to the other suppliers. For Europe, buying gas from more
reliable suppliers at a price premium turns out to be more attractive than
building storage capacity. |