Whenever I need a good laugh I look around to see what Gazprom (OTCPK:OGZPY) says about the perils of spot pricing mechanisms for gas. (OK. I confess. My sense of humor is, uhm, idiosyncratic.) And they seldom disappoint!
Like this gem:
Spot prices, which European customers have asked the Russian gas export monopoly to factor into long-term contract prices, should play a “subordinate, balancing role,” said Sergei Komlev, head of pricing and contract formation at Gazprom’s export division.
Gazprom supports “the existing dual hybrid pricing model,” Komlev said today at a conference in Moscow. Switching to 100 percent spot indexation or de-linking oil and gas prices “is unacceptable to gas producers because it will create opportunities for predatory pricing.”
Uhm, just how would that “predatory pricing” work, exactly? Predatory pricing involves the sale of a product at below marginal cost with the intent to drive competitors out of the market. Once exit occurs, the predator then raises price to super-competitive (and perhaps monopoly) levels.
The problem with this strategy, as appealing as it is to the economically illiterate (well, I am talking about Gazprom management, so . . . ), is that (a) it can only work under very special conditions, (b) these conditions unlikely to hold in practice, and (c) the documented examples of successful–or even attempted–predation are virtually non-existent. And I would say that the use of the modifier “virtually” is unduly cautious.
Predation is unlikely to work in an industry as unconcentrated as gas. And if anyone is in a position to be a predator, it is Gazprom, the world’s largest producer with the world’s largest reserves.
But the more basic problem is that predation can’t destroy the competitor’s productive assets. For instance, if a big gas producer tried to charge a below-cost price in an attempt to drive Gazprom out of business, Gazprom’s wells and pipelines would still exist, and could come back on line as soon as the predator attempted to raise price. Meaning that the predator would lose money driving down prices, but would never be able to profit by raising them to super-competitive levels.
In other words, predation is usually a great way for the predator to lose money. Which is why it is more a figment of heated imaginations than an economic reality.
As for empirical examples, Rockefellar’s Standard Oil was the poster child. Ida Tarbell–the daughter of a refiner that lost out in competition to Rockefellar–alleged in various muckraking articles and books that predation is how Standard Oil was built. But the painstaking, non-muckraking, historical research of John McGee (then at Chicago, and published in the JLE) showed that Tarbell’s characterization was all wrong. Standard Oil did not engage in predatory pricing.
So, predatory pricing is just another Gazprom bogeyman. A risible scare tactic employed to defend an increasingly indefensible position.
Gazprom reminds me of the little Dutch boy, holding back the waters by putting his finger in the hole in the dike. But Gazprom’s problem is that there are more holes than it has fingers. Just follow the news and you’ll see story after story about gas exploration and development and export just about everywhere in the world.
One interesting development occurred the other day in Qatar. Russia has downgraded its diplomatic relationship with the Gulf country because of an incident in which a Russian diplomat was roughed up, allegedly when Qatari officials tried to seize the diplomatic pouch he was carrying.
Recently, Qatar and Russia had been singing of the same hymnal with respect to gas contracting practices. Moreover, Qatar has been Russia’s main interlocutor in discussions to create a gas cartel analogous to OPEC. Given the proliferation of supply sources, actual and potential, the prospects for such a cartel are dim on economic grounds. But political friction between Qatar and Russia makes the prospects even more remote.
Given the gravity of the accusation, one wonders what would have been so serious as to lead Qatar to take such an action. Most likely guess: Something related to Iran. There are many indications that there is a covert war going on against Iran. The Gulf states are in a cold war with Iran–and maybe it is a little warmer than that. Russia’s role with Iran has been equivocal, at best. Under these circumstances, one can readily imagine why Qatar would go after a Russian diplomat.
Regardless of the actual story, political tension between Qatar and Russia is just another hole for Gazprom to plug.