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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HIGH PRICES OF GAS IN AUSTRALIA 2
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.

HIGH PRICES OF GAS IN AUSTRALIA 3
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.