EFFECTS OF LIBERALIZING THE NATURAL-GAS MARKETS IN WESTERN-EUROPE

This paper uses a numerical model to examine the long-run impact of a radical liberalization of the West-European natural gas markets. We st udy profit maximizing Cournot producers facing an ideal third party ac cess regime for gas transport. Producers sell gas either to large user s in the manufacturing industry and to gas-fired thermal power plants, or to local distribution companies. We first examine the case where n o traders exploit arbitrage possibilities and some producers have limi ted access to the markets. In this equilibrium net prices differ acros s markets. These differences disappear in the second case where trader s are introduced. The third case focuses on a complete European market for natural gas in which traders exploit all arbitrage possibilities and all producers can sell gas in all markets. We also study the impac t on the complete European market of changes in costs for production, transport, and distribution. Finally, welfare implications from a libe ralization of the West-European natural gas markets are discussed. We argue that a radical liberalization could increase economic welfare in Western Europe by 15% to 20% in the long run.