LNG is linking regional natural gas markets: Evidence from the gravity model

- Tests whether liquefied natural gas has globalized total natural gas market
- Traditional natural gas is still a regional commodity.
- Liquefied natural gas is a fully global commodity.
- Total natural gas market is not yet fully globalized.

Evidence exists that global natural gas markets have become more integrated over time. One possible explanation for this increased level of integration is that increased liquefied natural gas trade has increased the opportunity for price arbitrage by decreasing transport costs. If this explanation is true, then the natural gas market should become relatively more integrated because countries separated by large distances would be more willing to trade with each other. We employ a gravity model to test whether trade in liquefied natural gas has helped to de-regionalize the total natural gas market, using trade in the compressed natural gas market as a comparison benchmark. The results indicate that liquefied natural gas is indeed a global commodity, whereas the compressed natural gas markets are more regional. Importantly, we find that trade in liquefied natural gas has de-regionalized the total natural gas market.