Competition for Russia's Gazprom in Natural Gas

A February 1 article investigates Mr. Reinhard Mitschek’s plan to connect a gas pipeline from the Caspian area to Western Europe. This would weaken the monopoly that Russia has in natural gas. The building of the pipeline is scheduled to begin in 2011; however, deciding who will provide the needed capital of €7.9 billion ($11.03 billion) to fund the project is still in question. But Mr. Mitschek is optimistic that many financiers will be willing to fund the long-term initiative rather than investing in volatile short-term ventures.
Mr. Mitschek points out that the consumption of gas is increasing whereas European domestic output is decreasing. Russian officials have responded by proposing new pipelines to Germany and Bulgaria with the aid of Gazprom, the world’s largest natural gas company headquartered in Russia.

As Russia faces increasing global competition, natural gas prices are likely to decrease as a result of more suppliers producing the same good. This would increase the demand for natural gas. The Nabucco Gas Pipeline undertaking is a primary example of an issue that can arise in trade and investment policy. Investors must determine if providing capital for Nabucco will be profitable or whether Russia’s Gazprom will continue to hold the comparative advantage in the industry. Gazprom’s opportunity cost is lower than that of the Nabucco due to their efficiency and extensive knowledge of the industry, dating back to the 1940s when the first Russian reserves were found (Gazprom). Direct labor and manufacturing overhead will also play a role in the pricing of gas in Europe, as these costs are higher for European workers than with Russian employees due to the vast difference between their gross national incomes per capita (Skuba).

***This is a student submission written by Carlos Mercado, a student in my International Business class.  Thanks to Carlos for this piece.***

Things to Consider:
1.) Is Europe making the right move in building these pipelines considering the high costs of the project ($11.03 billion)? Or should they leave Russia to continue to provide them with the gas that the continent needs?

2.) How will this affect the political ties between the European Union and Russia?


Works Cited
Gazprom. 2010. 1 Feb. 2010
Lyons, William. “Nabucco at Center of Gas Politics.” The Wall Street Journal. 1 Feb. 2010. 1 Feb. 2010
Skuba, Charles. Lecture. Hariri Building, Georgetown University, Washington, D.C. 20 Jan. 2010.