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Article Summary

Discuss about the Assessment Task for Demand and Supply.

This section provides a brief discussion of the article by pointing out the 3 most significant issues contained within the article. The title of the article selected is “mining makes pollies confused about demand and supply” The topic under discussion is the demand and supply of certain resources in Australia and specifically seeks out to discuss the demand and supply of mining resources in Australia (Gittins 2016). Being that almost everyone has lived in a market economy all their lives, it would be anticipated that the impacts of supply and demand on price would be well fathomed, especially by any person who has managed to get themselves into the legislature. However, one of the main issue noted is the surprise that members of parliament on each side of Australian parliament have awful distress figuring out the operation of supply (Allen et al. 2012).

Politicians at times tell the public that rising supply will exert downward pressure on the prices and at times they say that it will not. This, therefore, means that politicians lack effective understanding of how supply and demand work. It is apparent from the article is that politicians from both sides of Australian Parliament gets it’s all wrong how supply works in regards to natural gas (Baye 2015). The second issue is that when it comes to the natural gas, the solutions to the price along with looming ‘shortages’ is for the NSW and Victorian governments to provide gas firms free rein to undertake their fracking wherever they select on the farmland of the state. This has been pointed out by the Minister of Industry, Greg Hunt.

The production of coal seam gas to the eastern state would uplift supply and hence exert downward pressure on the prices of gas as well as avert the risks connected to shortages. This could be true strictly if Australia would via its eastern seaboard had a closes market in the absence of international trade in gas products. The third issue is that the trick the pollies and the business interest expected to be helped do not want to focus their attentions to. The eastern states’ demand for gas and decrease in supply of gas from Australia gas fields have undergone little changes. Only the decisions of the government to permit the foreign investors to establish various gas liquefaction plants near Gladstone in Queensland.  Accordingly, the government has opened a link amid Australian closed gas market and the global market, whereby the world price of gas merely occurs to be extremely higher. This has resulted in Australian gas wholesale price to double to keep pace with the world price which is uncompetitive price as claimed by the Australian manufacturers while people are expecting a looming gas shortages.      

Relevant Underlying Theoretical Economic Concepts

The underlying theoretical economic concepts in the article is the concepts of economic forces of demand and supply and the prices and quantities changes. The other concepts that are apparent from the article is the impacts of international trade on the country prices vis-à-vis a closed economy. The Australian Gas prices is under the dilemma following the government opening the closed market to the international trade. The operationalizing of supply and demand remain unclear due to this change and hence, the need to understand the impacts of this change to the prices and quantity supplied and demanded in the Australian Gas market.

It is thought that as long the governments permit local gas producers to charge the world price, there will be never an extra amount of seam gas generation sufficient enough to decrease the world price. The federal pollies of both color bang on decreasing limitations on fracking since they are undertaking the bidding of their generous/mates party donors or future employers in the Australian gas industry. This is also done as a result them wanting to draw attention away for the reality that they initially permitted local gas prices to increase and do not want to change any policies to cut the prices downwards. Where the Australian gas market is allowed to charge the world price, no shortages of gas are expected.

This section puts emphasis on what the government policy is as well as what the government needs to do to solve the problem. The Australian gas market is presently undergoing substantial structural alterations. Notably, merely ten years down the line, low production and exploration levels saw the schemes advanced to import gas from Papua New Guinea. Presently, Australia is on the way of becoming the largest global LNG exporter, having invested over $200 billion in the previous decade. Further, exploration in Queensland alone has observed a rise in gas reserves to forty thousand from 5000 petajoules between 2006 and 2012.

Despite creating unrestrained openings for investment, export and employment such policies have as well been accompanied by challenges in local market. Industrial and Commercial businesses that are competing increasingly against exporters for the gas find it challenging to bargain supply contracts, that are presently set at huge prices, for dumpier periods and with higher rigidity around terms. However, new supplies from novel producers remain essential in promoting competition and ensuring reliable future supply.

Though the present gas supplies can meet local demand and export commitments till 2025, a series of reforms are inevitable. In the absence of these reforms, the prices will upsurge and the supply will in turn tighten coupled by the collapsing global oil prices that serves as disincentive to gas exploration, and diverse moratoria along with regulatory restrains on the exploration of gas which are presently in place crossways NSW, Victoria and Tasmania. The Labor opposition in Northern Territory is threatening its individual moratorium on unconventional extraction of gas.

Related Policy Issues

Reforms must focus on the creation of a more liquid as well as efficient supply market on east coast. ACCC has warned against having a local reservation policy because it serves as disincentive to investment. The governments must shift away from blanket moratoria on particular development of gas alongside managing risks on the basis of case by case. ACCC has further recommended a novel test in gas pipelines regulations to bar the market power exercise along with monopoly pricing. Over 20% of transmission pipelines on east coast are regulated with a regime that is vertically integrated business model thus unfit for the purpose.

Government must consider ACCC suggested mechanism. Existing contracts must be respected and continued investment promoted in pipelines as a way to ensure supply security. ACCC has further appreciated how significant it is to purchases in gas market to have adequate market info and transparency. The challenge of unequal negotiating power will be addressed by mandatory provision along with publication of essential data about reserves, transportation and commodity prices. The government must consider commercial sensitivities by making not making the prices in bilateral gas contracts confidential hence enhancing competitive negotiation (Salvatore 2015).     

This sections emphasizes on whether the article covers economic discrepancies or disregards significant economic policy problems and issues, or whether the article is inconsistent with economic theory. The article clearly covers the economic discrepancies and regards substantial economic policy problems/issues on the other. Particular, the article has sought out to present the true reflections of the economic forces of demand and supply that seemed not to be understood by the politicians. The article has stated categorically that both politicians from the political divide in Australian Parliament do not understand the supply of gas. Subsequently, it has explained the effects of opening the initially closed gas market to global trade on the domestic prices, gas supply and quantities demanded (McTaggart, Findlay and Parkin 2012). 

The article moreover regards noteworthy economic policy issues/problems. For example, it has highlighted the negative consequences that will arise from Queensland’s government keen interest on seeing the mine proceeded immediately and even willing to subsidize a rail line to the coastal port by one billion. The article has queried the impact of this investment to net royalty revenues. The article warns against believing the claim that rail line is not a subsidy since it is a loan by categorically highlighting that it is a subsidy as the line will open up Galilee Basin to other mines. Emergence of such is stated by the article to have greater influence on the downward pressure on prices of coal and tax receipts (Faarnham 2014).

The article further states critically that all said and done, Australia will have no much to gain but rather a lot to lose by continuing the development of an additional coal mine. The article even questions why despite the time for transitioning from fossil fuel to renewable energy as soon as possible, Queensland government is pushing down coal prices which apparently delays the process by escalating the comparable price demerit of renewables (Keat and Young 2009). The article effectively concludes by pointing out that Australian political office is compromised to interfere with economic reasoning powers of the pollies. 

References

Allen, W.B., Weigelt, K., Doherty, N and Mansfield, E. 2012. Managerial economics: Theory, applications and cases (International Student Edition), WW Norton, New York,NY.

Baye, M.R., 2015.  Managerial economics and business strategy, 8th edn, McGraw Hill, New York, NY.

Faarnham, G., 2014.  Economics for managers, 3rd edn, Pearson Education, London.

Gerber, J., 2013. International economics, 6th edn, Pearson Education, Upper Saddle River, NJ. Keat, P.G., and Young, P.K., 2009. Managerial economics, 7th edn, Pearson Education, Upper Saddle River, NJ.

Gittins, R., December 18 2016. Mining makes pollies confused about demand and supply. The Sydney Morning Herald, Issue Gas Industry , pp. 1-4. https://www.smh.com.au/business/comment-and-analysis/mining-makes-pollies-confused-about-demand-and-supply-20161218-gtdhxe.html

McTaggart, D., Findlay, D., and Parkin, M. 2012. Economics, 7th edn, Addison-Wesley, Sydney. Salvatore, D. 2015. Managerial economics in a global economy, 8th edn, Oxford University Press, Oxford.

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