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Discuss About The Demand And Supply Of LNG Management In Australia?

Demand and supply of a commodity can be identified as two of the major constituents affecting the prices of the same. Precisely, the demand and supply side of commodities has also depended on a number of factors regulating the prices to change. In this particular study, the impact of increasing international demand for liquefied natural gas (LNG) on the prices in Australia has been elaborated providing substantial evidence (Rudolph, 2016). According to the reports, by 2021-22, the entire value of the LNG exports in Australia has been estimated to reach $42 billion from $17 billion in 2015-16 (Drahos, 2017).

The report published by the Australian Government in the article ‘Resource and Energy Quarterly’ has confirmed that due to the increase in global demand and supply challenges in the long-term, the LNG prices in Australia have been forecasted to rise. In the meanwhile, the surge in the future contract prices can be identified as one of the leading drivers of surging the commodity price (Perry, 2016). On the other side, there are several risk factors associated with supply side as well (Bolle, 2011). Due to increase in the numbers of global competitors and reduction in the investment in the Australian oil and gas sector, the LNG projects in Australia are anticipated to decline.

In terms of LNG demand from the global side, the international gas consumption is expected to surge at an average annual rate of 1.7% in the next five years or so (Drahos, 2017). Due to increased demand from the emerging economies in Asia and the European Union nations, the LNG export infrastructure will get a boost in the Australia and US to meet the supply growth. In the meanwhile, LNG imports forecasts till 2022 have been presented as below:

                                                                    Figure: LNG Imports Forecasts

                                                                       Source: (Drahos, 2017)

As described in the figure, excluding Japan, the forecast has confirmed that the demand of LNG is expected to increase from South Korea, China, emerging Asian economies, Europe, and the rest of the world economies. In terms of numbers, by 2022, the consumption forecast of LNG is expected to reach 330 billion cubic metres, up by 65%. Therefore, import of LNG in China will rise to 48 million tonnes by 2020, up by 19% (Drahos, 2017). Evidently, China will be the largest LNG importing nations in the world contributing towards the demand growth of the resource in a single handed way. Furthermore, import of LNG from emerging Asian economies i.e. India, Afghanistan, and Pakistan, etc. has estimated to increase that will evidently benefits the Australian exports. As a result of the consequences, the prices of LNG in Australia will maintain an upward curve in the future as well.

Increasing international demand for LNG


Irrespective of Australia being the second largest exporter of LNG across the globe, it is expected to face a shortage of supply of natural gas in the upcoming years. According to Bruce Robertson (an energy specialist), the Australian Government has allowed the gas extracting companies to sell its precious energy resources in the overseas market without considering the future needs of the Australian people (Smead, 2015). Hence, the major consequence that can be expected in the upcoming years is a shortage of LNG by the end of 2020.  Furthermore, it is expected that the price of LNG will increase at an unexpected rate due to its growing demand in the international as well as domestic market and shortage of supply due to extinction of the natural resources.

In order to explain the challenges for Australia economy regarding the price of LNG, the demand and supply curve theory has been applied in this context. It can be seen that the increase consciousness among the Australian consumers and development of technology will lead to a minimum level of rise in the quantity demanded for natural gas in the future  (Giri and Roy, 2011). However, the higher level of export in the current years will lead to undersupply of LNG by a huge amount. Hence, the price of LNG is expected to increase by a huge amount in the future. A demand and supply curve diagram has been presented below for better understanding:

                                                                                         Figure: Demand and Supply of LNG

                                                                                               Source: (Gilman, 2016)

On the basis of the above figure, it can be seen that the huge fall in supply of LNG in the local market will lead to a leftward shift in the Supply Curve from S to S1. In the same manner, the increase in the quantity demanded by a smaller amount in the domestic market will lead to a rightward shift in the Demand Curve from D to D1. Hence, the market equilibrium will shift from E to E1 leading to an increase in the price from P to P1.

On the basis of the above analysis, it can be seen that a hike in the price of LNG will be evident in the Australian economy, which will lead to an economic imbalance in the nation. Chang (2017) suggest that the Australian government must put a check on the export quantity of natural gas in order to maintain market equilibrium in the future. For example, the government can impose a higher tax rate for export of LNG and the revenue earned from the export of the commodity can be used as subsidies to maintain a equilibrium price in the Australian market (Hattwick, Brown and Sailors, 2014).

The discussion in the study has identified that the global demand of LNG has estimated to be increased at a considerable rate in the next five years. Due to continuous surge in demand of LNG, the Australia LNG exports will be expected to reach at a record high in the near future. On the other hand, some of the supply side challenges can play a major role fuelling the future contract prices of LNG. Driven by the global demand growth and internal supply challenges, the prices of LNG in Australia has recovered from US$ 7.2 a gigajoule in 2017 from a record low of US$ 5.5 a gigajoule in 2016. The surge of the prices in LNG is expected to maintain the incline supported by demand growth in the global market. Hence, it is important for the Australian Government to put a check on the production and export of LNG in order to maintain market equilibrium in the industry

References

Bolle, F. (2011). Competition with supply and demand functions. Energy Economics, 23(3), pp.253-277.

Chang, C. (2017). The raw deal Australians get over their gas. [online] NewsComAu. Available at: https://www.news.com.au/finance/economy/australian-economy/how-australia-is-being-screwed-over-its-gas/news-story/4187e60617aec18e87d57453cfca0167 [Accessed Aug. 2017].

Drahos, N. (2017). Resources and Energy Quarterly. [online] 5(5), pp.61-72. Available at: https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/req/Resource-and-Energy-Resources-Quarterly-March-2017.pdf [Accessed Aug. 2017].

Gilman, L. (2016). Economics. 3rd ed. Minneapolis: Lerner Publications.

Giri, B. and Roy, B. (2011). Supply Chain Coordination with Price-Sensitive Demand Under Risks of Demand and Supply Disruptions. Technology Operation Management, 2(1), pp.29-38.

Hattwick, R., Brown, B. and Sailors, J. (2014). Demand, supply, and the market mechanism. 5th ed. Englewood Cliffs, N.J.: Prentice-Hall.

Perry, J. (2016). Energy prices. 4th ed. New York: Nova Science Publishers.

Rudolph, M. (2016). Natural Gas Supply, Demand and Prices. Natural Gas, 4(9), pp.29-30.

Smead, R. (2015). Gulf Coast LNG Exports Still Moving Despite Oil-Price Decline. Natural Gas & Electricity, 31(10), pp.28-32.

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