Trade with endogenous transportation costs: The case of liquefied natural gas

- LNG transportation costs are found endogenous to regional natural gas price spreads.
- Endogenous transportation cost transfers trade rents to transportation industry.
- Market integration is stronger when accounting for endogenous transportation cost.

This paper investigates the relationship between LNG shipping costs and regional natural gas price spreads. We use data on natural gas prices and shipping costs to analyze the distribution of trade benefits within the LNG value chain when shipping costs are endogenous to price spread developments. Our empirical analysis suggests that for the 2006-2014 period, the LNG shipping sector has had an implied scarcity rent on LNG shipping capacity of $0.14/MMBtu for the EU/US spread, $0.32/MMBtu for the Asia/EU spread, and $0.42/MMBtu for the Asia/US spread. We highlight in a counter-factual analysis that this distributional effect is not economically negligible. We investigate how including endogenous transportation costs affects the measured degree of price convergence between regional natural gas markets. We find that price convergence is stronger when we control for variations in transportation costs rather than implicitly assuming fixed or exogenous costs.