Spatial Price and Quantity Relationships in World and Continental Commodity Markets

Abstract

Modeling world or continental natural gas, oil, coal, or electricity requires a representation of the spatial nature of such commodity markets—multiple interconnected and/or independent source points, intermediate points, and consumption points. Spatial commodity models, properly constructed, expose the underlying economic fundamentals—prices, basis differentials, flowing quantities, and why prices and quantities embrace certain relationships but not others. This paper examines spatial market equilibrium from a methodological perspective and puts forth results that explain interrelationships of prices and quantities of commodity throughout a market of competing/complementary supply chains. The objective is to allay common “myths” by counterexample and at the same time posit some realities both methodologically and by example.