Elements of the Asia Pacific gas market : market power and efficiency

Abstract: Natural gas trade in the Asian Pacific market is heavily dependent on the demand from Japan, which imports around 75% of the gas traded as LNG (liquefied natural gas) in the region. This study argues that the buyers in Japan, through cooperation have the potential to exert the market power that their large market share provides them with. The study adopts a monopsony model, which suggests that Japanese buyers to some extent exercise their market power. The optimal price indicated by the adopted model is higher then the actual price, which would indicate that Japan, has used its market power. Given the indication of market power, the second part of the thesis analyzes the fossil fuel mix efficiency in the power sector in Japan. The analysis is based on a model that has cost minimization according to shadow prices, not actual market prices, as basic assumption. Given this assumption relative price efficiency with respect to fossil fuel mix is tested. The results from the model do not give any support to reject the hypothesis of relative price efficiency in the fossil fuel mix. Hence, if the Japanese LNG buyers exercise any market power they despite that uses natural gas efficiently, relative the price of other fossil fuel, in their electricity generation.