Welfare Losses in Commodity Storage

We develop a game theoretic model of a shared commodity storage facility whose injection/ejection and space resources have been allocated to multiple selfish firms. We assume a setting where each firms injectability and deliverability depend on overall inventory within the store. This is most common in settings that involve the storage of liquids or gases such as natural gas or oil. We analyze the strategic interaction that occurs in a pre-commitment game where firms commit to inject until a certain time and subsequently withdraw the commodity until it is exhausted. We contrast equilibrium and welfare maximizing outcomes whilst casting our analysis in terms of a natural gas storage facility. We also study the effects of incorporating a “use-it-or-lose-it” policy on overall welfare. Our results indicate that significant inefficiencies can occur in both settings.