Streetwise Professor

June 14, 2010

But I Thought Spot Markets Were the Bomb, or Continued Adventures in Russian Transaction Cost Economics

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 2:37 pm

Apparently Gazprom’s Alexei Miller didn’t get Putin’s memo on spot markets as the cure to all your commodity contracting ills:

Addressing the annual European Business Congress in France for the first time since 2008 – when he predicted oil prices would soar to $250 per barrel – Mr Miller said sales had recovered in the first few months of 2010, “but the month of May has seen the positive trend reversed. As we see, financial turmoil in the eurozone has started to affect energy markets”.

Swiping at those pressing for linkage to spot prices, Mr Miller said this price could soon rise as demand recovered, while Gazprom’s long term contracts offered greater stability.

“In several cases we have agreed to take into account the spot market component,” he said. “But please note: when in a couple of years the market bounces back, do not ask us to revert to previous price practices.”

Tying gas prices to oil made some sense when (a) these things were closer substitutes, and (b) there was absolutely no spot market in gas, but a well-developed oil spot market.  The case, on transaction cost grounds, for utilizing oil as a pricing benchmark for European gas is far, far weaker when there is a growing (organically) spot market for gas in Europe.

Miller is, surprise, surprise, talking his rather large, and underperforming, book.  With weak demand and surging supply for gas, the relation between gas values and oil prices is far weaker than it was only a couple of years ago.  Miller wants to live in the past, and keep on pricing like it’s 2007.  But it’s not, and it’s not likely to be for a long, long time.  Demand looks to be weak for an extended period, especially given Europe’s current economic ferment, and the supply situation has been turned upside down by shale gas and its concomitant effects on LNG flows.  Oil and gas have diverged, and not in a way that is favorable to Gazprom.  Miller way want to hold back the tide, but the pressures on the existing pricing mechanism are likely to grow over time, and rapidly.

Perhaps recognizing this, Miller tries to rain on the shale parade:

In his speech, Mr Miller also sought to dispel what he said were “myths” that a recent surge of LNG and the rapid development of shale gas in the US could threaten Gazprom’s position on global markets.

Citing high investment requirements for developing shale gas deposits and “low output at wellheads”, Mr Miller said shale gas could only serve as a replacement for the depletion of local traditional gas production. “There are no reasons to crown it and elevate it to the throne,” he said.

Hmm.  Then why is Gazprom moving into shale?  And more importantly: the markets apparently think quite differently.

And speaking of “depletion of local traditional gas production”: where is Gazprom going to replace its depleting local traditional gas production?

Print Friendly, PDF & Email


  1. It truly never ceases to amaze me how utterly stupid and self-destructive Russians can be.

    A mature, intelligent, successful Russia would have been doing all it could to nurture and support the West so as to promote demand for its products and fill Russia’s coffers with cash.

    Instead, a childish, ignorant, barbaric Russia chooses to be led by a proud KGB spy who relentlessly attacks the West at each and every opportunity and seeks to bring back the cold war and the USSR.

    Meanwhile, he contradicts himself every time he opens his mouth, sounding daily more and more like the Soviet apes who drove the nation into ruin and collapse, and the braying jackasses who call themelves “citizens” do nothing but applaud and plunge their heads into the frozen tundra.

    Comment by La Russophobe — June 14, 2010 @ 5:50 pm

  2. So… Russia should make big investments to maintain supply in European markets while European gas demand is low, spot prices are dropping, and show no sign of recovering, and Euro supply from shale is skyrocketing.

    Do I have your points down correctly?

    Phoby, Phoby, Phoby…

    Yes, that’s what the poor, deprived West needs, nurturing from Mother Russia… (snicker)

    Comment by rkka — June 14, 2010 @ 6:45 pm

  3. Will Phoby attack Russia when it finally buys big into the U.S. shale gas fields for creating good paying jobs in this American Mancession? Will she say those gas workers should have gotten a big butted gubm’t job instead?

    Comment by Mr. X — June 18, 2010 @ 2:51 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress