Assignment On High Prices Of Gas In Australia

HIGH PRICES OF GAS IN AUSTRALIA 1
HIGH PRICES OF GAS IN AUSTRALIA
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Introduction
The article titled “Australia's competition watchdog warns high gas prices threaten
manufacturers” from Reuters by Paul on match 5th 2019, explains how high gas prices are
affecting the local manufacturers. According to Australia's competition watchdog, the high prices
of liquefied natural gas (LNG) in Australia have increased the cost of production to local
manufacturers (Paul, 2019). If this trend persists, then some firms in east cost will go out o
business and cause a rise in unemployment. The higher prices of gas in this country are attributed
to high exports of this product, reduction in exploration expenditure, and drilling bans.
Liquefied Natural Gas Market
Manufacturers use the liquefied natural gas as a source of heat for their activities. On the
east coast of Australia, the market for liquefied natural gas is dominated by six companies. These
firms include Arrow Energy, Santos, BHP, Origin, Shell, and Exxon (Chang, 2017). Some of
these firms also control the pipeline deployed in the transportation of this product. Due to a few
number of producers, the market for liquefied natural gas can be categorized as an oligopoly with
a low level of competition.
Economic Analysis
The Decline in Supply of the Liquefied Natural Gas
The higher prices of gas on the east coast of Australia result from supply-side factors.
These factors include exportation, reduction in exploration expenditure, and drilling bans. When
the producers started exporting the liquefied natural gas to foreign countries, the supply of this
product to local consumers has fallen. Furthermore, declines in exploration spending and drilling
bans by some states have caused a fall in the supply of the liquefied natural gas.
In graph 1 below, the drop in the supply of liquefied natural gas due to the factors
highlighted above is depicted by the leftward change in the supply curve from S to S1. As a
result of this change, the equilibrium quantity of gas declines from Q1 to Q and the equilibrium
price rises from P to P1. The rise in the price of this product implies an increase in costs for both
local producers and consumers.

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C S1
Price
S
P1 W
P G
Demand
Q Q1 Liquefied natural gas
Figure 1: Supply
The Decline in Consumer Surplus
The market for a given product avails benefits to both the producer and consumer (Frank,
2015, p. 57). The advantage the producer receives from taking part in the market is known as
producer surplus. Conversely, the benefit to the consumer is known as consumer surplus.
Consumer surplus is the difference between the greatest price the purchasers are ready to pay and
the market price (Tucker, 2016, p. 45). Consumer surplus, therefore, appraises the net benefit
arising from consumption.
Changes in the market price cause a change in producer surplus. When the market price
increases, the consumer surplus will decline. Similarly, when the market price falls, the
consumer surplus will increase (Sexton, 2015, p. 62). In the market for gas, the price has hiked
due to a decrease in supply. As a result, we anticipate a fall in consumer surplus.
On the graph below, before the decline in supply, the consumer surplus is given by the
triangle TPG. When the supply curve shifts leftward, the price surges P to P1. The market
equilibrium changes from position G to position W. As a result, consumer surplus declines to
triangle TP1W. When consumer falls, the consumers are worse off.

HIGH PRICES OF GAS IN AUSTRALIA 4
T S1
Price
S
P1 W
P G
Demand
Q Q1 Liquefied natural gas
Figure 2: Consumer surplus.
Recommendations
Liquefied natural gas occupies a vital role in economic growth in Australia. Firms and
consumers rely on this product for their daily operations. A hike in the price of this product is
detrimental to functioning of firms. Apart from causing some businesses to halt their production,
this shock reduces the competitiveness of local manufacturers (Abbott, 2016, p. 42). Thus, there
is a need for government involvement to guarantee steady supply of gas to facilitate the
operations of businesses as well as boost economic growth. Some of the measures the
government can take to ensure stable domestic supply of gas include removal of regulations
barring gas exploration, infrastructure development, and Enhance competition in gas industry.
Elimination of Regulations Prohibiting Gas Exploration
Restrictions on gas exploration and drilling by some states have a significant impact on
the supply of this product to the market. Australia has the aim of being a net exporter of liquefied
natural gas and at the same time meeting the local demand. With restrictions on gas exploration,
then the country will not achieve this objective. Therefore, the leadership of Australia should
relax policies hindering the extraction of this resource. This move will not only motivate the

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existing producers but also attract new players in this sector (INC IBP, 2017, p. 56). The increase
in supply will ensure that there is sufficient gas for both local and international buyers.
Infrastructure Development
For any project to flourish, better infrastructure is essential. Infrastructure such as roads
and pipelines needed to facilitate the production of gas requires a massive amount of investment
(Inkpen, et al., 2017, p. 24). Therefore, both central and state governments should work together
to establish the necessary infrastructure to facilitate the exploration, drilling, and transportation
of this resource. Better roads and pipelines will easy the movement of gas to consumers and thus
cause a decline in the costs of doing business for firms.
Enhance Competition in the Gas Industry
The market for liquefied natural gas in Australia is dominated by a few payers. This
implies that the level of competition in this industry is very low, and firms are likely to restrict
output to create a shortage that culminates in higher prices. Therefore, the Australian
Competition Commission should work on improving transparency to encourage competition in
this industry.
Conclusion
Australia is experiencing high prices of gas due to a low domestic supply. The local
supply of this product has been hindered by exports, reduction in exploration expenditure, and
drilling bans. Australia's competition watchdog has warned that if this trend continues, some
local manufacturers face the risk of closing their businesses. Some of the measures the
government can use to ensure a steady domestic supply of gas include removal of regulations
barring gas exploration, infrastructure development, and enhance competition in gas industry.

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Reference list
Abbott, M., 2016. The economics of the gas supply industry. London : Routledge, Taylor &
Francis Group.
Chang, C., 2017. How Australia is being screwed over its gas. [Online]
Available at: https://www.news.com.au/finance/economy/australian-economy/how-australia-is-
being-screwed-over-its-gas/news-story/4187e60617aec18e87d57453cfca0167
[Accessed 1 October 2019].
Frank, R. H., 2015. Microeconomics and behavior. New York, NY : McGraw-Hill Education.
INC IBP, 2017. AUSTRALIA BUSINESS AND INVESTMENT OPPORTUNITIES YEARBOOK
VOLUME 6 OIL AND GAS INDUSTRY : ... northern territory. [S.l.] : IBP USA.
Inkpen, A. C., Moffett, M. H. & Ramaswamy, K., 2017. The global oil & gas industry : stories
from the field. Tulsa, Oklahoma : PennWell Corporation.
Paul, S., 2019. Australia's competition watchdog warns high gas prices threaten manufacturers.
[Online]
Available at: https://www.reuters.com/article/us-australia-gas/australias-competition-watchdog-
warns-high-gas-prices-threaten-manufacturers-idUSKCN1QM044
[Accessed 1 October 2019].
Sexton, R. L., 2015. Exploring economics. Boston, MA, USA : Cengage Learning.
Tucker, I., 2016. Microeconomics For Today. Australia : South-Western: Cengage Learning.