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Demand Of Certain Resources In Australia

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Question:

Discuss about the Demand and Supply of Certain Resources in Australia.
 
 

Answer:

Introduction

Two basis and most important tools of microeconomic analysis are supply and demand. Demand is the quantity that the buyers want to buy at a given point of time supported by the purchasing power.  On the other hand, Supply refers to the quantity that producer willing to supply at that time. In the report, the supply and demand of mining resources especially crisis in natural gas has been evaluated. Rapid expansion of export market for LNG has put a threat of widely spread blackout in New South Wales. In the article recently published on “The Daily Telegraph” this issue has been reflected.

Essence of the Story

Australia is rich in different resources including agricultural resource, human resource , mining resources and others. The analysis of demand and supply of resources in Australian economy differs slightly from the general analysis. Human resource and mining resources need special.  Rising price of electricity is becoming a major concern for Australian residence and also for industries. The rising price of electricity is found to be contributed from the shortage if supply in the gas market (dailytelegraph.com.au 2017). Increasing exportation of natural gas causes limited supply available to fill the domestic demand. Hence, increases the possibility of a statewide blackout.

Queensland is accounted for supplying 70% of gas in the Eastern Australia. Almost three fourth of this share is now being acquired by exporters like Santos, Shell and Origin (theaustralian.com.au 2017). The outflow of domestic supply of natural gas contributes to an asymmetry in demand supply situation the domestic market. The immediate impact is an unexpected jump in price. A stated in the report the supply shortage is hampering power generation fuelled by natural gas for a clean energy target. As most of the old generators run with coal has closed down natural gas becomes the major source of electricity supply. The situation has worsened so much that a future gas shortage is predicted in 2018, summer. Issues relating to supply shortage and price hike are spreading so rapidly that possibility of Supply shortfall is expected in South Australia, Victoria and NSW. Gas price in Australia has increased by 57% in 2016-2017 (abc.net.au 2017).  There is a cartel formation in the gas market further increases the suffering of the Australian people.

 

Economic theories and concept

Demand Supply analysis in the resource market

In order to maintain stability in free market balance between supply and demand conditions is important. Any mismatch between these two major forces result in either a high price or low price in the market (Mercer, de Rijke and Dressler 2014)

Figure 1: Supply shortage causing price rise in energy market

(Source: As created by the Author)

DD and SS are the initial demand and supply curve of the market. With a contraction in supply the supply curve shifts leftward and the new supply curve S1S1. The new equilibrium is above the earlier one with a new equilibrium price P** as compared to P* before and the market quantity is Q**, lower than earlier Q*.

The same problem is facing in one of its major resource area- the market for natural gas. Prior to 1990, the contribution of Australian mineral resource was not so significant because for the twin effect of its weak international position and comparatively high price. However, with massive development in areas of export give a boost in international resource demand (Friedman 2017). In connection to this, the domestic supply from large-scale gas plants has decreased significantly as they become more interested in exportation. One example of Gas plant is Bowen Surat gas plant. It completely ceased its supply for domestic market. The increasing focus on export has started creating problem long before (Vivoda 2014). This problem now aggravated largely causing serious concern.

Cartel and market condition

Cartel is one form of oligopoly where a few oligopoly sellers joined to form a group and takes composite decision regarding price and output. This gives an extensive market power to the few sellers. Formation of cartel behaves in a similar way as single monopoly does (Simshauser and Nelson 2015).

Figure 2: Market with cartel

(Source: Friedman 2017)                      

The figure above shows the effect of cartel formation. The third panel shows the final industry’s output. Firm with lower cost produces a higher quantity (X1) and that with higher cost produces a lower quantity (X2). The joint industry supply is X and the joint profit is much greater that individual profit.

The exporters in Australia, takes a similar strategy to recover loss in the international market. It is surprising that Australian consumer sometimes pay higher price for their own domestic product that paid by foreign countries Such as Japan and other importer (Holzer et al. 2017)

Recommendation

Despite having sufficient stock of mineral resources, Australia is still running out of supply because of too much focus on export. This is not desirable. Hence, regulation is needed in the market. Government can set a minimum price in the market following price floor strategy. The choice about the minimum price should be made very carefully such that it neither hurts the plant owner nor hurts the consumers.

Export is the main reason for this crisis. Hence, government can restrict the quantity of export by regulation. Only excess of the supply after meeting the domestic demand should be allowed for export.

Another thing that can be done is to build new coal plant run with efficient technology that can minimize emission.

Conclusion

The external demand of LNG in Australia is creating deficiency in available supply. The direct effect of supply shortage in gas market is on the power supply in the state. Shortfall of supply increases price. Based on the present situation future supply shortage is predicted in states like South Australia, NSW and Victoria. The price in the market is further manipulated with cartel formed by the suppliers to recover loss in export market. Hence, government regulation is needed to ensure uninterrupted energy supply in the market. Regulation can take the form of imposition of price floor strategy or restriction of export quantity.

 

References

Dailytelegraph.com.au. (2017). Gas shortages could cause NSW blackouts. [online] Available at: https://www.dailytelegraph.com.au/news/nsw/nsw-energy-crisis-gas-shortages-could-trigger-widespread-blackouts/news-story/ce7284fa5bfe589215c57ea3d3d4d77b [Accessed 22 Aug. 2017].

Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University Press.

Holzer, K.K., Muirhead, J.R., Minton, M.S., Carney, K.J., Miller, A.W. and Ruiz, G.M., 2017. Potential effects of LNG trade shift on transfer of ballast water and biota by ships. Science of the Total Environment, 580, pp.1470-1474.

Mercer, A., de Rijke, K. and Dressler, W., 2014. Silences in the midst of the boom: coal seam gas, neoliberalizing discourse, and the future of regional Australia. Journal of Political Ecology, 21, pp.279-302.

Simshauser, P. and Nelson, T., 2015. Australia's coal seam gas boom and the LNG entry result. Australian Journal of Agricultural and Resource Economics, 59(4), pp.602-623.

Theaustralian.com.au. (2017). A case of supply and demand. [online] Available at: https://www.theaustralian.com.au/business/a-case-of-supply-and-demand/news-story/a7555341c88a6b3a2c319557d00ed162 [Accessed 24 Aug. 2017].

Vivoda, V., 2014. Natural gas in Asia: Trade, markets and regional institutions. Energy Policy, 74, pp.80-90.

Webster, L. (2017). Metal and mineral commodities expected to lift in five years. [online] ABC Rural. Available at: https://www.abc.net.au/news/rural/2016-07-27/expert-says-australias-mining-downtunr-has-hit-the-bottom/7663938 [Accessed 24 Aug. 2017].

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