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Wild Ructions In Commodity Markets

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Question:

Discuss about the Wild Ructions in Commodity Markets.
 
 

Answer:

Introduction:

For some time now, the price of gas in Australia has been rising significantly. Mainly, this is attributed to the fact that gas supplies in the country have reduced dramatically whereas its demand remains high. By and large, this has made gas very expensive in the country as helpless customers are forced to endure, thanks to the system of profiteering and collusion in the industry. For this reason, Matt Chambers (2017), in his article ‘fears of a winter gas shortage as price skyrocket’ explains how forces of demand and supply for gas will result in significant increases in the price of the commodity.

It is fundamental to note that the incoming winter season in the country is expected to experience more gas shortages characterized by very high prices. According to Chambers (2017), the price of gas in the country will continue to rise if there is a cold winter. Mainly, this is because there will be extra demand for the product from gas-fired power stations, thereby leaving limited amounts for other users. Most power stations in the country have entered into long term contracts with large, commercial and industrial users whose demand for gas is relatively large. In turn, this may result in significant shortages of the product in the country.

Economic theory opines that an increase in demand over and above the available supply results in significant shortages of a product. In turn, the available supply can only satisfy the needs of few individuals, who then compete fiercely for the product. Subsequently, this brings about substantial rises in the price of the commodity. In the same way, Chambers (2017) forecasts that the Australian economy may experience significant increases in the demand for the product while its supply may remain relatively constant during the winter period.

It is imperative to note that Chambers (2017) explains that the increased demand for the product mainly originates from the $80 million boom time LNG investments in Queensland. Characteristically, the investment has led to an increase in the demand for the product in the east coast. He explains that LNG projects are consuming large volumes of gas at a flat rate and thus considered better customers than individual households. For this reason, they are granted volume discounts, making it difficult for other small businesses and individual users of gas to compete with them for gas supplies.

In addition, the expected cold winter in the country is bound to increase the demand for heat in the country. Subsequently, the increased demand for heat sources will bring about a significant increase in demand for gas, especially among households and businesses. More specifically, there will be an increase in demand for both physical gas and gas-fired generation (Chambers, 2017). Mainly, the demand will be as a result of the cold weather, forcing households to look for alternative sources of heat for their homes and enterprises. Indeed, this will raise the demand substantially.

 

While the demand for gas is expected to increase, its supply is projected to remain relatively constant during this period.  So far, the reduction in the supply of gas in the country has been due to the subsequent closure of Hazelwood. Thus, southern Australia will live through winter without the supply of gas from Hazelwood (Chambers, 2017). In turn, this has significantly reduced the available supply of gas in the country (Lane, n.d.).  In addition, the available supply in the country has further been reduced due to the fact that plants such as Gladstone’s Curtis Island export a substantial amount gas from the country, thereby reducing the available supply in the country (Holditch and Chianelli, 2008). Thus, this has significantly affected the total supply in the country by reducing the availability of the product to small enterprises and households.

Chambers (2017) further traces the genesis of the reduced supply of gas to the fact that the southeast region of Australia is hit hard by insufficient gas supply due to the existence of few suppliers in the area. Currently, the main supplier of gas in the region is the Exxon-Mobil-BHP Billiton partnership that owns and controls the Bass Strait gas fields (Chambers, 2017). Thus, they control the overall supply of gas in the region (Chambers, 2017). In the event that the partnership decides to limit and hoard gas supplies, the region is bound to suffer substantially (Stewart, 2017). Thus, buyers in the southeast are forced to obtain their gas from other regions such as Queensland (Chambers, 2017). Notably, this element has substantially affected the supply of gas in the region, thereby causing shortages of the commodity.

It is imperative to point out the fact that the increased demand for the product amidst a constricted supply is bound to cause shortages during the impending cold winter. In agreement with the law of demand, Chambers (2017) further narrates how the increase in demand for gas in the country during the winter period will result in subsequent shortages of the commodity in the. In turn, this will result in significant increases in the price of the commodity. Particularly, the low supply of gas will force households and consumers to compete for the available supply of gas in the country (Hopkins, 2017). In turn, this will create pressure on the price of the product, thereby raising it significantly. Notably, the prices of gas in the country have already risen in the past few months, and a further upsurge will make the product expensive due to unsustainable prices (Sier, 2017).

Conclusion

All in all, all factors considered Australia is going to experience significant shortages in the supply of gas. Primarily, this will be as a result of an increase in demand for the commodity during the winter season while the supply of the product is expected to remain minimal. By and large, the high demand for the product is caused by the recent LNG investments in Queensland which has set demand off the peak. In addition, during the cold winter period, individuals are bound to increase their demand for heat generation, thereby enhancing the demand for the product. Unfortunately, the supply of gas is relatively inelastic. Consequently, this will result in further rises in the price of gas in the country.

 

References

Chambers, M. (2017). Fears of a winter gas shortage as prices skyrocket. [Online] The Australian. Available at: https://www.theaustralian.com.au/business/mining-energy/fears-of-a-winter-gas-shortage-as-prices-skyrocket/news-story/25d1ea68b2a72694d99d42b21f18da07 [Accessed 26 Apr. 2017].

Chambers, M. (2017). Gas supply crisis now ‘worst-case,' says ACCC’s Rod Sims. [Online] The Australian. Available at: https://www.theaustralian.com.au/business/mining-energy/gas-supply-crisis-now-worstcase-says-acccs-rod-sims/news-story/8bd733409acba0dccd5f9c1226228b79 [Accessed 26 Apr. 2017].

Gas Supply and Demand in the 21st Century. [Online] Ohio State University. Available at: https://www.physics.ohio-state.edu/~wilkins/energy/Resources/survey/harnessing-mtl-energy-2008Apr/supply-oilgas-21st.pdf [Accessed 26 Apr. 2017].

Holditch, S. and Chianelli, R. (2008). Factors That Will Influence Oil and

Hopkins, A. (2017). Why the gas industry should argue for a price on carbon. [Online] Echo net daily. Available at: https://www.echo.net.au/2017/04/gas-industry-argue-price-carbon/ [Accessed 26 Apr. 2017].

Lane, R. Factors Affecting Demand & Supply of Oil Prices. [Online] eHow. Available at: https://www.ehow.com/info_8621442_factors-demand-supply-oil-prices.html [Accessed 26 Apr. 2017].

Sier, J. (2017). Wild ructions in commodity markets fail to worry investors. [Online] The Australian. Available at: https://www.smh.com.au/business/markets/wild-ructions-in-commodity-markets-fail-to-worry-investors-20170410-gvhh76.html [Accessed 26 Apr. 2017].

Stewart, R. (2017). Shell agrees on gas supply deals in Australia. [Online] Ohio State University. Available at: https://www.marketwatch.com/story/shell-agrees-gas-supply-deals-in-australia-2017-04-06-24852010 [Accessed 26 Apr. 2017].

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