Understanding The Causes Of High Domestic Gas Prices In Eastern Australia: An Essay.

I need an Article Critiqued. The requirements are mentioned below and the article is attached:

1. Provide a brief discussion of the article and point out the important issues contained within the article. Do not simply summarise.
2. Identify the underlying theoretical economic concepts relevant to the article
3. Identify the related policy issues (e.g. what government policy is or should be) and debate around the issue.
4. Provide a critique if the article contains economic discrepancies/ ignores important economic policy problems or issues, or is inconsistent with economic theory.

Causes of High Domestic Gas Prices

The article on “making cents” of the Eastern Australian Gas Market shows the significant causes of the currently high domestic gas prices in the country (Quentin Grafton et al. 2018). A shortage of the gas in the Eastern Australian Market has been forecasted and should be dealt with in time to prevent a further price increase. The article applies economic theories to explain the cause of the rising gas prices and further discusses the long-term impacts the contracts made on gas has on the supplies produced domestically as well as the effects it has on the prices. Policies made by the policymakers of the country have been acknowledged in the article as the pillars that protect and ensure gas supply as well as the high prices of the gas given an alternative.

There is a rapid increase in the wholesale prices of the Eastern Australian market which has led to several policy interventions. The unconventional gas has an increased cost of production which in turn increases the prices. Furthermore, there are several other causes of the high prices including the price floors implemented by the netback, market power practiced by the owners of the gas as well as the contracts in the domestic supply by the industrial users. Policymakers in the country are providing solutions through a quick fix to substitute the shortages experienced with gas (Quentin Grafton et al. 2018). Therefore, policies are expected to transform the challenges through the promotion of competition, prioritization of the gas market transparency which are more likely to be more effective. This is compared to the exports control restrictions to achieve the domestic gas required.

The article has used several economic concepts to explain and discuss the Australian gas market. The first concept is the supply and demand concepts which are also referred to as the invisible hand in the market (De Silva et al.  2016). Generally, the two will adjust in the market to reach equilibrium as stated in the Keynesian theory of economics. However, due to external forces that influence both the demand and supply of the Australian gas the government through the policymakers are responsible for adjusting the policy that governs the production and supply of the gas. This is where we find that the Australian Domestic Gas Security Mechanism has come up with a policy that will assist in responding to the high domestic gas prices together with the forecasted fall in the supply of gas in the future (Holz et al. 2015). In most cases, a policy implementation to control the prices of the product in the domestic country is through controlling the supply of the product as exports. Furthermore, the scheme place by the Australian government as a mechanism will help control the exports of gas by the minister of resource in case the supply shortage is proved.  We find that it is similar to the economic concepts in place when they intend to lower the domestic prices by ensuring gas exporters produce at least more gas. Thus they will have enough to exports and the gas needed domestically will not reduce at any one point.

Impact of Contracts on Gas Supplies and Prices

On the macroeconomic concepts of economics, economic growth of the country is a concern to all individuals involved in productive activities. Production in the economy will determine the Gross Domestic Product which profoundly contributed to by the revenue earned from gas exportation. Any economic drop causes more hardships to the citizens of the country. It is, therefore, a definite concern in the article that any restrictions in the exports of the gas will hurt the economy of the country. On the other hand, it is a concern to the domestic gas market due to the high price and forecasted drop in gas supply. On one side the local market is hurting due to the high prices but on the other hand restrictions on exports will cause harm. This kind of a situation requires an intervention through policy implementation that takes into consideration both the exporter and the domestic consumer.

Exporters through the policies that make their contrast rigid would benefit as a result. The reduction of the willingness of the exporters to produce gas is due to policies that alter the long-term contracts. With such policies, therefore, it could be easy for the resource life to be predicted. Furthermore, more restrictions on the gas increase the sovereignty risk as well as reduce future investments in the country (Simshauser and Nelson 2015). Thus exports limitation on gas in a state will pose a threat of a declined economic growth. The restrictive gas reservation policy is identified as a policy that could cause a high present value loss to the gas market in Australia.

Policies that intend to reduce the gas exported in the long run will at the end reduce domestic supply in Eastern Australia in the long term. However, this was not the original intention as it will cause an increase in the local price far much than it is currently. Thus the ACCC thought it wise that gas reservation policy in the country should not be applied (Shi and Variam 2017). For this reason, several policies are perceived to be in a position to solve the problem. Among the issues include the reviewing of the carriage model advantages, studying of the gas market structure in the country again, officiate the market price transparency as well as improving the data analysis of gas by the government and the policymakers.

The policy implemented by the government to commit the exporters to meet their projected gas shortage through selling to consumers at a fixed price as well as at sale offers is not economically possible. This is because with a lack of any resource in the country the cost of extracting the resource increases (Parker et al.  2015). Thus the price of the resource will increase, and the obligation of the exporters by the policy cannot in any way be met. Sales offers and the fixed prices will be out at the time of gas shortage.

Evaluation of Gas Supply Policies

Recommendation from the AEMO does not coincide with the economic theories. It recommends that increased production could solve the high prices of gas in the perfect markets in the existing fields of gases (Hua et al. 2016). However, in a perfect market, they are many buyers and sellers who have perfect knowledge about the product at hand. Thus, production in the market has reached maximum utility, and it could not, therefore, be a solution to the high prices of gas.

Moreover, no consideration has been made on the cost and benefit of using an alternative source of energy with the intent of reducing the demand and the price of gas. It is economically correct that high prices of gas could cause people to identify new ways to provide energy for their production (Graham et al. 2015). However, the use of gas will not wholly die as the alternative will at some point increase in price due to increased demand (Egging and Holz 2016). Furthermore, none of the single solutions provided will be in a position to impact positively on their consumer, and at the same time, the solution offered will not have an immediate impact. Therefore, a clear means through which a solution is obtained to bring to equilibrium the use of gas and other energy sources should be identified.

References

De Silva, P.N.K., Simons, S.J.R. and Stevens, P., 2016. Economic impact analysis of natural gas development and the policy implications. Energy Policy, 88, pp.639-651.

Egging, R. and Holz, F., 2016. Risks in global natural gas markets: investment, hedging and trade. Energy Policy, 94, pp.468-479.

Graham, P.W., Brinsmead, T. and Hatfield-Dodds, S., 2015. Australian retail electricity prices: Can we avoid repeating the rising trend of the past?. Energy Policy, 86, pp.456-469.

Holz, F., Richter, P.M. and Egging, R., 2015. A global perspective on the future of natural gas: Resources, trade, and climate constraints.

Hua, Y., Oliphant, M. and Hu, E.J., 2016. Development of renewable energy in Australia and China: A comparison of policies and status. Renewable Energy, 85, pp.1044-1051.

Parker, R.W., Hartmann, K., Green, B.S., Gardner, C. and Watson, R.A., 2015. Environmental and economic dimensions of fuel use in Australian fisheries. Journal of Cleaner Production, 87, pp.78-86.

Quentin Grafton, R., Shi, X. and Cronshaw, I., 2018. “Making Cents” of the Eastern Australian Gas Market. Economic Papers: A journal of applied economics and policy, 37(1), pp.42-54.

Shi, X. and Variam, H.M., 2017. East Asia’s gas-market failure and distinctive economics—A case study of low oil prices. Applied energy, 195, pp.800-809.

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.

Valadkhani, A., Nguyen, J. and Smyth, R., 2018. Consumer electricity and gas prices across Australian capital cities: Structural breaks, effects of policy reforms and interstate differences. Energy Economics.