Date of Award

5-22-2011

Document Type

Honors Thesis

Department

International Studies

First Advisor

Andrew T. Wolff

Language

English

Abstract

On January 1, 2009, the fears of many European policymakers were confirmed. After a payment dispute could not be resolved, Russia shut off natural gas supplies to Ukraine, leading to widespread gas disruptions across Europe. While this episode highlighted Europe’s vulnerability in the energy sector, concerns over the security of supply for natural gas had been existed well before 2009. Ever since the discovery of gas in the 1950s, it has played an increasingly important role in Europe’s energy consumption. Due to certain irregular technological and economic features of natural gas as an energy resource, the market has always been uncompetitive and characterized by a limited number of suppliers, leading to security of supply concerns. In attempt to change this, the European Commission began an effort to enact liberalization reforms in 1998 with one of three Directives.

These Directives were designed to make the market more competitive and facilitate the entry of new suppliers into the market. The expected results of this are two-fold: lower prices for consumers, as well as increased energy security due to more options in suppliers. A quantitative analysis of EU documents shows that policymakers overwhelming believed that liberalization would increase energy security. However, after an examination of the three liberalization Directives using a mix of economic and qualitative data, there is little evidence that the legislation had positive effects on increasing competition and therefore energy security. Prices have increased, market concentration remains high, and customers are not switching suppliers. The second half the paper looks at the projects that the EU and member states proposed with the explicit goal of increasing energy security and looks at whether liberalization aspects are present. Some of the examples include the Nabucco pipeline, and the Nord and South Stream pipelines. In the projects chosen, none of them included any of the main aspects of liberalization.

A final examination of the reason behind such a stark disconnect between what the EU says and actually does reveals that there are certain characteristics of the natural gas market that simply cannot be altered by liberalization. While opening up the market is supposed to facilitate the entry of new suppliers into the market, the characteristic of gas as a natural resource signifies that even if market conditions are favorable, supply cannot be increased purely due a firm’s desire. While the goal of creating an internal market for energy appears beneficial in theory, it is clear that certain characteristics of the natural gas market make it impossible in practice.

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