Strategic Storage and Market Power in the Natural Gas Market

Laure Durand-Viel

In a competitive setting, storage is traditionally used to smooth production costs or face demand variations. However, oligopolistic sellers can also use inventories as a commitment tool. We analyze strategically motivated storage in a model where, as in the European gas market, both producers and suppliers have market power. In this two-tier oligopolistic structure, storage allows suppliers not only to preempt future demand, but also to counter producers' market power.This, in return, exerts a positive externality on rival suppliers, who benefit from lower spot prices, and downstream competition increases. Strategic storage results from arbitrating between these antagonistic effects.