News article: The high price of Australian gas: is low supply really to blame?
Introduction of issue
The article poste on the website of The Guardian Australia gives a view about the demand and supply of gas in Australia. There has been a hike in the prices of the gas because of lack of supply; contradicting to it the fact is that the country is producing more that optimum level of gas in the country, it is producing even more than giant gas exporter. One such fact which appeared as a reason of high price is because of the exporters who are exporting the gas in foreign market without analyzing the demand of local market. The ACCC’s interim gas report stated that the country hold’s plenty of gas for local consumption with them but still there is shortfall in domestic supply because the lead exporter of gas preferred to sell their produce in external market instead of fulfilling the domestic demand. As discussed above there was adequate generation of gas to meet the export as well as international requirement but the lead exporter like Gladstone, Origin and Santos made it difficult for the commoners attain gas for their use (Janda 2017).
Source: (Janda 2017)
The exporters need to liquidify gas and then ship them to in the country worldwide which required additional cost but still companies sold it to 30% less to amount to which they can sell in domestic market. In second quarter $9.52 was the average earned whereas the international market still expects to receive downfall by $6.50 per GJ. Furthermore the LNG projects forecasted that the country would produce 90 PJ of LNG which shall be used to overcome the domestic demand and export internationally as well but surprisingly 63.4 PJ was used for export only which again left the country on same stage. One reason which appeared was that the lead exporters wanted to sell gas in the country but they were being threatened by the political leaders. Only Santos among them acknowledges the demand of gas in Australia and was aiming to equalize it but the other leaders wanted to earn revenue from the local Australians. The Liberal NSW energy minister, Don Harwin looked at this view as a “self-indulgent climate culture war” (Slezak 2017).
Source: (Davis 2017)
Talking about the economics behind the issue it shall be noted that there are a few sources which can provide adequate supply of gas in country and attain equilibrium, but there are restrictions which are hampering the supply in the country. The growth of Australia is hampered in this case as the people of the country are devoid from use gas due to hike in prices (Santos 2017). The prices of gas in Australia rose due to many reasons which are discussed below:
- Political instability: the ministry of gas has their very own motives due to which they are not allowing the suppliers to provide gas in the local market and fulfill its demand. The government has their very own aims due to which they are restricting the supply and motivating the demand in the country. And subsequently rise in demand and fall in supply of product leads to increase in its prices.
- Profit motive of Suppliers: There are three lead suppliers present in the country who run major activities of demand and supply in the Australian market which are Gladstone, Origin and Santos. The three companies are manipulating the market conditions by restricting the supply and increasing demand in local market. With increase in demand prices will automatically increase resulting to which the companies can sell their product at high prices in the local market and earn more profit. Contradicting to which the companies are making negative export by selling LNG at lower prices internationally if compared to the prices present in local market (Davis 2017).
- Reserves being harassed: Robertson gave a suggestion to ACCC that reserves shall be made in favor of the country, under which margins shall be applied which shall state the use of gas in international and domestic market separately, but the opposite actually happened. Reserves kept for Australians were also used to supply internationally (Carbaugh 2013).
Source: (Eia.gov 2017)
- Non-execution of Narrabri project: This project stated the lead producers of the country like Santos will take initiative to supply LNG domestically in NWS and other local regions of Australia. The project stated that Santos will provide around 50% of natural gas in NWS which is being extracted from the state land. This will somehow equalize the demand and supply resulting to reduction in the prices of gas in the country is well. But Australian Energy Market Operator (Aemo) believes that Narrabri produces one gigajoule in $7.25 which is more that the fair price expected by ACCC. Also this project was seen as enviable to commercial extract gas (Santos 2017).
- Lastly, the AGL which is world second biggest gas exporter is importing gas so as to fulfill the domestic demand. Resulting to which the prices are getting higher with time.
All the factors present in the industry are acting in negative way for the country, apart from that the lead suppliers are looking at the opportunity cost will makes them to sell gas at low prices and internationally and at high prices in Australia. Relating it to the Production Possibility Frontier, it shall be noted that the country is currently not in an adequate position as it has not used all available resources adequately (Nas 2016).
Recommendation to the stakeholders
Thus it shall be recommended that the ministry shall strictly apply regulation to the export of gas and it shall also levy taxes on the export. Demand can be met only if the gas is adequately supplied in the company by the suppliers. Gas extorted from state land shall be used for domestic purposes only. In this way only prices can be reduced in the country.
Thus, in the limelight of above-mentioned events it shall be noted that the suppliers and the ministry is applying the policies which are responding negatively to supply of gas and is increasing the prices as well.
Carbaugh, R.J., 2013. Contemporary economics: an applications approach. ME Sharpe.
Davis, C., 2017. Global LNG Demand Quietly Matching Supply as More Players Join Game, Says Shell Exec. Viewed on December 18, 2017 from < https://www.naturalgasintel.com/articles/109531-global-lng-demand-quietly-matching-supply-as-more-players-join-game-says-shell-exec>
Eia.gov, 2017. Australian domestic natural gas prices increase as LNG exports rise. Viewed on December 18, 2017 from < https://www.eia.gov/todayinenergy/detail.php?id=33412>
Janda, M., 2017, Gas prices will rise and there's not much we can do to stop it. Viewed on December 18, 2017 from < https://www.abc.net.au/news/2017-03-09/gas-prices-will-rise-and-there-is-not-much-we-can-do-to-stop-it/8340536>
Nas, T.F., 2016. Cost-benefit analysis: Theory and application. Lexington Books.
Santos, 2017. About. Viewed on December 18, 2017 from < https://narrabrigasproject.com.au/about/fast-facts/>
Santos, 2017. What we do. Viewed on December 18, 2017 from < https://www.santos.com/what-we-do/activities/new-south-wales/gunnedah-basin/narrabri-gas-project/>
Slezak, M., 2017. The high price of Australian gas: is low supply really to blame?. Viewed on December 18, 2017 from https://www.theguardian.com/australia-news/2017/sep/29/the-high-price-of-australian-gas-is-low-supply-really-to-blame