The Streetwise Professor offers two columns probing the malignant practices of Russia's Gazprom energy monopoly and dispelling the propaganda that the Kremlin has been spewing forth regarding it's recent attempts to weaponize natural gas:

The most common defense of Russia’s/Gazprom’s increasing the price of gas to Ukraine, Belarus, Azerbaijan and others is to deny that the motive is political, and to claim instead that these consumers are now being charged the same market price as the Western Europeans. There is a kernel of truth to this, but it obscures the crucial question: just what kind of market is this?

Some markets are competitive. Some markets are not. The market for Russian and most Central Asian gas falls squarely under “not.” Gazprom has a state enforced monopoly on the transit of gas across Russian territory. Moreover, the Russian government is aggressively playing the “Great Game” in Central Asia and the Caucasus to stymie development of any alternative transport routes. For instance, Russia used its overwhelming leverage against Armenia to get that impoverished nation to limit the size of a gas pipeline from Iran, thereby ensuring that the pipe could not be used to transport Iranian gas into Europe.

Russia’s central geographic position, and its heretofore successful efforts to impede development of alternative transportation routes gives the transit monopoly Gazprom great market power. It is effectively a monopsonist upstream, and can exploit this monopsony power to depress the purchase price of gas from Turkmenistan and other “independent” suppliers. Moreover, because the supply of gas into Europe from non-Russian sources is constrained (and will continue to be so unless and until Europe invests in substantial LNG capacity), Russia faces a downward sloping demand for its gas in Europe, which gives it some monopoly power. Indeed, Eastern and Central Europe have even fewer alternatives to Russian gas, and are even more vulnerable to the exercise of market power.

This combination of monopoly and monopsony power is reflected in the chasm between the purchase price of gas from Turkmenistan and Kazakhstan–about $45-$65 per mcm for years, lately raised to $100 per mcm–and the price in Europe–upwards of $230 per mcm. Based on a price of $230 to Germany, and a price in Turkmenistan of $65, this translates to a price difference between consumer and producer of about 3.5 cents per mcm per kilometer. This represents a markup over the Turkmenistan price of about 63 percent per 1000 kilometers. (Even at the now higher Turkmenistan price of $100, the shadow price of transportation is about 2.8 cents per mcm per kilometer, and the markup is 42 percent per 1000 kilometers.)

To put things in perspective, the basis (i.e., the price difference) between the price of gas in Chicago, and the price of gas at the AECO hub in Alberta, a distant Canadian gas supply location, averaged a little over 1 cent per mcm per kilometer from November 2003-January 2007. The markup is about 5.5 percent per 1000 kilometers. Examining the AECO-Iroquois route (Iroquois is a gas hub in New York state), the average basis worked out to about 1.5 cents per mcm per kilometer in 2003-2007, and the markup was about 7.5 percent of the AECO price per 1000 clicks. Iroquois is often quite congested, especially during the winter, so it tends to exhibit a wide basis compared to other locations in North America. Nonetheless, the Europe-Turkmenistan basis dwarfs the Iroquois-AECO basis, and dwarfs the Chicago City Gate-AECO basis even more.

Now, some of the disparity arises because of Gazprom’s inefficiency. (If the exercise of market power doesn’t bother them, global warming worriers should fret about the massive amounts of methane–a greenhouse gas much more potent than CO2–that leaks from Gazprom’s pipes.) But a healthy chunk reflects a market power rent that exists in the no-entry Russian market but does not exist in the much more competitive North American gas transportation market.

The Europeans have importuned Russia to open its gas transportation system. Sorry, not going to happen. This arrangement is too lucrative for the Russian government and the various hogs that feed at the Gazprom trough. This market is not competitive, and is unlikely to become so any time soon.

So let’s call a spade a spade. Let’s not pretend that the price of gas in Europe is a competitive market price. It’s not. It’s a monopoly market price, supported by a state-enforced entry barrier. It deserves no deference from supporters of free markets. The subsidized prices that once prevailed in Ukraine and Belarus don’t deserve deference either; nor does the highly subsidized domestic Russian price.

But two wrongs don’t add up to a right. This has long been a dysfunctional market supported by the dysfunctional exercise of government power. The old dysfunction was to subsidize the consumption of energy by inefficient manufacturing enterprises. The new dysfunction is to extract monopoly and monopsony rents. Prices were too low before. They are too high now (for consumers–still too low for producers).

So, the next time I hear someone repeat the mantra that Gazprom is just charging “the market price,” I will be tempted to sing a few bars from the Minor Threat song “I don’t wanna hear it”:

I don’t want to hear it
‘Cause I know that none of it’s true
I don’t want to hear it
Sick and tired of all your lies
I don’t want to hear it
When are you gonna realize…

That I don’t want to hear it
Know you’re full of ****

Except, I’ll probably fill in the ellipses. ‘Cuz I am–The Streetwise Professor.

The approach to the Gasprom’s actions is very correct because everyone is talking about high price, but one reality that mentioned here is ‘Gasprom is monopoly in Europe’. So, there is no right device or method to measure the right price for gas. On the other hand Gasprom increased the price form $110 to $235 to Azerbaijan and Georgia. However, Germany receives from $230 even less than Azerbaijan and Azerbaijan and Georgia is closer to gas production fields than Germany.

I can believe Russian price hike to Azerbaijan is only for economical reason when I will believe that main reason for opposition of Russia to Caspian Transit Pipeline is environmental rather than political (as Russia mentions).

Instead of acting together and dictating the price to Gasprom which doesnot have any other serious pipeline for exporting its gas to other markets than EU. EU countries quietly and lonely make contracts with Gasprom assuming that they are getting cheaper prices than other EU countries. Which is decreases bargaining power almost to zero. Leader of EU Germany is the best example for that or France too. Someone should remind them that Russia is building gas pipeline to China. No one is going to be safe after this pipeline. Contracts have been a piece of paper for Russian government if you have doubt you can look to Azerbaijan’s experience which had a 5 year contract from $55 and after 2 years Gasprom was demanding $235.

Once again I would like to appreciate writer to prove with numbers and provide new approach to Gasprom’s “market price” . So, when you hear “economical reasons” of Gasprom you should remember and sing “I dont wanna hear it”. There is a good saying “Fool me once shame on you, fool me twice shame on me.”

One of the points that Gazprom and its acolytes attempt to use to gull the lazy minded is that there is a symmetry between Europe and Russia/Gazprom. Europe has one major supplier–Russia–but Russia has only one consumer–Europe. I have even seen the term “bilateral monopoly” used in this context. Relatedly, Gazprom constantly retorts “security of demand” whenever Europeans have the temerity to question the security of their Russian supplies, suggesting that Gazprom is as vulnerable to opportunistic behavior by its customers as are its customers to a gas shutoff by Gazprom.

Strike up another chorus of “I don’t wanna hear it!” Europe is not a monolithic entity in the same way Gazprom is. Not only are there several handfuls of European countries, each of whom pursue their own interests (EU rhetoric to the contrary), but even within most European countries there are multiple consumers of gas, including utilities and industrial consumers. That is, the demand side is relatively fragmented and competitive compared to the supply side. Moreover, Gazprom is a past master at playing off one European government against the other, and European companies against one another. Divide and conquer is an old game, and Gazprom/Russia play it well. Sad to say, they are aided in this by short sighted, cynical European governments. As Samir notes, the French just cut their own deal with Gazprom. Germany has been a major enabler, although Angela Merkel is pulling back somewhat. The question remains, however, as to whether she can overcome the influence of the German banking and industrial establishment, which has a long history of cynical dealings with Russia (as during the early Bolshevik period immediately following Brest-Litovsk). The Italians have also been major collaborators.

Thus, there is no symmetry between the monolithic Russian supply side and the fragmented European demand side, and Putin’s/Gazprom’s repeated attempts to assert such balance where none exists is further evidence of their disingenuousness. Actually, I can tolerate that; I don’t blame the wolf for its nature. What I cannot tolerate is the failure to think by those in the west who parrot such nonsense.