Sunday, April 29, 2007

Russia in Natural Gas Market

April 2007 witnessed the first gathering of globe’s largest producers of natural gas in Doha, Qatar. While many of dignitaries attending Doha meeting knew each other from meetings of another Cartel; OPEC, there was one new addition to their club: Russia. Many including Qatari minister of oil emphasized that Doha meeting was not a step toward creating a cartel[1]. Still the gathering itself increased the discomfort of those concerned with the consequences of establishing a natural gas cartel similar to OPEC[2]. Are their concerns justifiable?

If one believes the statements of those who attend Doha meeting, they were not intended to create a cartel. However they were seeking to clarify the rules of the game and have a cooperative approach to international market of natural gas. Particularly Russian representative was insisting that his country is not in favor of a natural gas cartel[3]. The author intends to believe him.

During last years Russia has utilized its position as a monopolist supplier of European natural gas market to gain advantages of a political nature. A cartel is formed to increase profitability and to influence market price by determining a profit maximizing output. Its success depends greatly on its member commitment their assigned quota[4]. That commitment would restrain Russia liberal use of its monopolist position in Europe. Thus one wonders why Russia should seek to help in establishing a cartel at all.

On the other hand it cannot be denied that Russia has learnt a lot from its dealing with European buyers and has enjoyed the political advantages of its position. It is a fact that Russia is seeking to expand its presence in international gas market. Recently it was announced that Russian companies will build Iran-Pakistan-India gas pipeline, nicknamed Peace Pipeline. Dominating supplies to West, it seems Russia would like to dominate the supplies to East as well. Thus the main question is not that if a cartel of natural gas producers is in cards. It is what role Russia is preparing itself to play in this market, that of a game player or a Stackelberg leader?

[2] BBC April 9th 2007
[4] Carlton D. W. & Perloff J. M., Modern Industrial Organization. 4th Edition Addison Wesley.

No comments: