Changing Contract Structures In The International Liquefied Natural Gas Market A First Empirical Analysis PDF Download

This dissertation consists of three separate essays that seek to examine the interaction between firm behavior and government policy in international energy and transportation markets. Chapters 1 and 2 are closely related in that they both focus on the liquefied natural gas (LNG) industry, one of the fastest-growing energy markets globally. The first chapter measures market power in the LNG spot market and studies how market power influences pricing, trade and welfare. I develop a method for inferring market conduct that utilizes information on sellers' pricing and quantity decisions across multiple geographically segmented markets. My test for market conduct is based on the observation that sellers exercising market power engage in third-degree price discrimination, whereas sellers behaving competitively do not. Using data from 2006 to 2017 on spot market trade flows, spot prices, shipping costs and seller capacities, I estimate a structural model of LNG trade and pricing that incorporates spatial differentiation, capacity constraints and trade frictions and flexibly nests different models of seller market power. I find that seller decisions are consistent with a Cournot model and unlikely to be generated by a competitive model. The total deadweight loss from market power is estimated to be USD 12 billion, or about 4.5% of total revenue. I find that market power plays a key role in exacerbating inter-regional price differentials. Perhaps the most distinct feature of the LNG industry is its reliance on long-term contracts (typically 20 years in length). Long-term contracts facilitate efficient levels of investment by sellers faced with the risk of ex-post holdup. Contractual rigidities, however, reduce the ability of the market to respond flexibly to demand uncertainty. In the second chapter, I provide the first empirical analysis of the trade-off between hold-up risk and contract rigidity, using the liquefied natural gas (LNG) industry as a case study. I structurally estimate a model of contracting, investment and spot trade that incorporates hold-up risk and contractual rigidities, using a rich dataset on LNG contracts, investment, trade flows, and spot prices. LNG buyers are estimated to have substantial bargaining power, implying that sellers face considerable hold-up risk when making investment decisions. In the short-run, allocative efficiency would improve through reduced use of long-term contracts. However, investment decreases by 35% in the absence of long-run contracting, suggesting that long-term contracts play a significant role in combating holdup at the cost of short-term allocative efficiency. The final chapter of this dissertation is co-authored with Panle Jia Barwick and Myrto Kalouptsidi. Despite the historic prevalence of industrial policy and its current popularity, few empirical studies directly evaluate its welfare consequences. We examine an important industrial policy in China in the 2000s, aiming to propel the country's shipbuilding industry to the largest globally. Using comprehensive data on shipyards worldwide and a dynamic model of firm entry, exit, investment, and production, we find that the scale of the policy was massive and boosted China's domestic investment, entry, and world market share dramatically. On the other hand, it created sizable distortions and led to increased industry fragmentation and idleness. The effectiveness of different policy instruments is mixed: production and investment subsidies can be justified by market share considerations, but entry subsidies are wasteful and dissipated by the entry of inefficient firms. Finally, how the policy is implemented matters: the distortions could have been significantly reduced by implementing counter-cyclical policies and by targeting productive firms.