Current Blog Entries by Larry Fry, CCP, MBA

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Deregulated Market Marginalizes Gazprom’s Gas Supplier Monopoly Attempt in Europe

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Per Washington Post columnist George Will’s recent editorial on the punishment of highly excessive corporate behavior by deregulated markets (i.e., his expounding upon economist David Harrington’s argument per the same), Gazprom’s natural gas supply/transportation strategy (business model) for Europe serves as an excellent example of this fairly non-intuitive concept.  Harrington argues that sellers of goods who initially price their products on the extreme high end are often forced to relinquish these same goods at deep discounts later on due to the efficiencies of deregulated markets.  As a result, global regulation (or re-regulation) on the part of governments becomes unnecessary over the long run.  This is because the efficiencies of the deregulated markets that set in over time cause these markets to become more transparent in nature, thus resulting in better informed buyers, as well as more options being made available to these buyers.  In addition, there is the time decay of the value of the goods that occurs as time passes on as well, which is somewhat similar to what happens to the value of call options as they approach their expiration dates (i.e., the “theta” concept).  As a result, price gougers such as Gazprom become the victims of their own marketing (or  pricing) ploys in the end as they are unable to overcome the inevitable deregulated market adjustments that occur over time. 

Gazprom’s recent attempt to secure a monopoly over the supplying of natural gas to European countries has been marginalized by deregulated market forces, which have adjusted to Gazprom’s excessively high prices by reducing the demand for the product, thus resulting in lower natural gas prices (on a global level).  This coupled with the current economic downturn across the world has contributed to the demise in the global demand for natural gas since less of it is being consumed now.  And while attempting to establish a European based gas supplier monopoly, Gazprom became committed to long-term contracts for gas from Central Asian suppliers at a cost which is now far in excess of the current (or resulting) global natural gas prices.  As a result, Gazprom is now sitting on huge contractual amounts of over-valued natural gas supplies that it must continue to purchase from Central Asian suppliers and then sell at large losses.  This could conceivably result in years of major losses for Gazprom if the world’s natural gas prices continue to moderate, thus resulting in the decimation of both its current business model and its influence (i.e., Russia’s influence) as a major player in the global economy.  And based on Vice President Biden’s recent “blistering criticisms” of Russia per its failing economy, loss of face, and a lack of effective leadership, the Kremlin’s declining influence within the global economy (and power) structure is becoming apparent among the world’s leaders.  But all of this is still not stopping the Kremlin from attempting to forge a gas supplier monopoly in Europe in order to use it as a foreign policy “tool” with its neighbors during times of political conflicts, etc.

Note:  The invoking of some type of  eleventh-hour “force majeure” clause could be a last resort action taken by Gazprom in an effort to extract itself from having to contractually purchase high priced gas from Central Asian suppliers and then sell at large losses to European buyers.

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