This report analyses the demand and supply of natural gas in Australia and the reason behind the increasing price of natural gas in the domestic market. It also provides recommendations to develop this sector further.
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Running head: ECONOMICS FOR BUSINESS Economics for business Name of the student Name of the university Author Note
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1ECONOMICS FOR BUSINESS Executive Summary: The price of natural gas in Australia has increased due to shortage of supply. However, this country has produced huge amount of natural gas to meet the domestic demand. Hence, this report has intended to analyse the reason behind this excess demand and consequently huge price within the domestic market, based on some newspapers.
2ECONOMICS FOR BUSINESS Table of Contents Introduction:...............................................................................................................................3 Newspaper analysis:...................................................................................................................3 Economic concept:.....................................................................................................................4 Recommendations:.....................................................................................................................7 Conclusion:................................................................................................................................8 References:.................................................................................................................................9
3ECONOMICS FOR BUSINESS Introduction: At present, natural gas reserves of Australia are measured as 3921 billion cubic meters (bcm), among which 20% are used for commercial purpose. The largest gas basins of this country are Browse and the Carnarvon basins, which are situated at the western part. During 2014-2015, Australia has produced 66-bcm natural gas among which, Queensland and Western Australia have produced around 80% gas. (Merien-Paul, Enshaei and Jayasinghe 2017)Thus, based on some recent newspapers, this report has intended to analyse the demand and supply of this natural resource after which, some recommendations are also provided to develop this sector further. Australian policymakers along with the producers and exporters of natural gas can shoe their interest on this report. Newspaper analysis: Based on the Guardian, it can be stated that gas prices have increased sharply in the domestic market, due to lack of supply in the east coast region of Australia. The country has possessed huge amount of natural gas while this amount is sufficient to meet the domestic demand (Slezak 2018). However, due to some economical activities, prices of this concerned natural resource have increased significantly. For instance, exporter has exported maximum amount of natural gas in foreign markets with cheaper prices and this in turn has led the price of this concerned resource to decrease further. On the other side, the Narrabri coal seam gas project has also remained unable to reduce the prices of Australian gas.
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4ECONOMICS FOR BUSINESS Figure 1: Export of Australian natural gas Source: (Tradingeconomics.com. 2018) The figure 1 has represented the increasing trend of natural gas export of Australia during 2008 and 2016. However, between 2015 and 2016, this trend has fluctuated by small amount. Consequently, people of the east coast part are going to pay electricity bill worth $ 430 or more in 2019 due to increasing gas prices. For New South Wales and Queensland, this bill may become around $434 and $ 313, respectively while, for Victoria, this estimated price is $254 (Karp 2018). Based on consumption trend of natural gas along with its predicted price, those figures are estimated. This trend has also considered the present gas policy settings of the Australian government while the wholesale prices of gas have remained at a stable position. According to the Guardian, people have paid more than $175 for their electricity bill compare to the wholesale gas prices. Economic concept: This increasing price of natural gas in Australian market can be described with the help of demand and supply concept of microeconomics. Due to excess demand, the price of a product can increase significantly (Kang, Ratti and Yoon 2015). This can be explained with the help of adjoining figure.
5ECONOMICS FOR BUSINESS Figure 2: Excess demand Source: (created by author) In figure 2, excess demand for natural gas has been represented Q1 Q2 amount at P1 price. However, the equilibrium price is P0 at which Q0 amount of natural gas is supplied. Hence, to reduce this excess demand for natural gas, the producer can increase the price of this concerned product up to P0. This situation is also true for the domestic market of Australian natural gas. To reduce the excess demand in home market, Australian producers have charged higher prices. Due to increasing price of natural gas, the electricity bill of Australian people has also increased significantly (Trujillo-Baute, del RÃo and Mir-Artigues 2018). In this context, the concept of complementary goods can be described, where natural gas and electricity can be described as complementary product of each other.
6ECONOMICS FOR BUSINESS Figure 3: Impact of price increase on complementary product Source: (created by author) In figure 3, the impact of price increase of Australian natural gas on the electricity bill of this country has been shown. According to this figure, supply of natural gas in domestic market has decreased as producers have exported huge amount of this natural resource to the foreign country. In this figure, the price has increased by P0 P1 amount while the quantity supplied has decreased by Q0Q1 unit. Consequently, the electricity bill of this country has increased by B0B1 unit (Wei, Zhao and Li 2015). On the other side, the demand for natural gas in international market has increased due to it lower price (Rothenhoefer and Stauffer 2017). The producers of natural gas have charged this price to increase the export of this product and this in turn has helped Australia to earn huge amount of foreign capital.
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7ECONOMICS FOR BUSINESS Figure 4: lower price of natural gas in foreign market Source; (created by author) Figure 4 has represented the increasing demand of natural gas by Q0Q1 unite while the price of this product has decreased by P0P1 unit. However, due the higher exchange rate of foreign countries, the country can earn huge amount of foreign currency in terms of domestic one. This in turn has helped producers to earn huge profit. Recommendations: After discussing the entire concepts, some recommendations can be provided. Firstly, the domestic price of natural gas has increased due to its excess demand while supply has remained comparatively low. Hence, the government of Australia can impose some policies to restrict the huge supply of this natural resource in foreign markets without fulfilling the domestic demand (Blenginiet al.2017). This policy can control the higher price of natural gas in domestic market. Moreover, by imposing various restrictions related to export of natural gas, the government can influence producers to increase its price in foreign market. This further can decrease the huge demand for this product in foreign market.
8ECONOMICS FOR BUSINESS Moreover, the government can also provide subsidy to the producers of electricity to buy natural gas at a lower price. This in turn can reduce the electricity bill of Australian households. Excess bill of electricity has reduced the consumer surplus of Australian households. Conclusion: In conclusion, it can be said that the market of natural gas can be described with the help of demand and supply curve. Excess demand in domestic market has increased the price o this product and this in turn has led the electricity bill to increase further. On the other hand, by charging lower price in foreign market, producers have helped the demand for natural gas to increase significantly. Hence, to manage this situation, some recommendations regarding trade restrictions have been provided.
9ECONOMICS FOR BUSINESS References: Blengini, G.A., Nuss, P., Dewulf, J., Nita, V., Peirò, L.T., Vidal-Legaz, B., Latunussa, C., Mancini, L., Blagoeva, D., Pennington, D. and Pellegrini, M., 2017. EU methodology for critical raw materials assessment: Policy needs and proposed solutions for incremental improvements.Resources Policy,53, pp.12-19. Kang, W., Ratti, R.A. and Yoon, K.H., 2015. The impact of oil price shocks on the stock marketreturnandvolatilityrelationship.JournalofInternationalFinancialMarkets, Institutions and Money,34, pp.41-54. Karp, P. 2018.Australians to pay up to $430 more under uncompetitive gas market, analysissays.[online]theGuardian.Availableat: https://www.theguardian.com/australia-news/2018/feb/05/australians-to-pay-up-to-430- more-than-they-should-for-electricity-analysis-says [Accessed 21 Apr. 2018].- one of the main article Merien-Paul,R.H., Enshaei,H. and Jayasinghe, S.G., 2017. LNGpropelledshort-sea shipping in Australia; an opportunity or obligation.Australasian Coasts & Ports 2017: Working with Nature, p.658. Rothenhoefer, K.M. and Stauffer, W.R., 2017. Dopamine prediction error responses update demand.Proceedings of the National Academy of Sciences,114(52), pp.13597-13599. Slezak, M. 2018.The high price of Australian gas: is low supply really to blame?. [online]theGuardian.Availableat: https://www.theguardian.com/australia-news/2017/sep/29/the-high-price-of-australian- gas-is-low-supply-really-to-blame [Accessed 21 Apr. 2018].- one of the main article Tradingeconomics.com. 2018.Australia Exports of Natural Gas, Whether Or Not Liquefied | 1988-2018. [online] Available at: https://tradingeconomics.com/australia/exports-of-natural- gas-whether-or-not-liquefied [Accessed 21 Apr. 2018].
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10ECONOMICS FOR BUSINESS Trujillo-Baute, E., del RÃo, P. and Mir-Artigues, P., 2018. Analysing the impact of renewable energy regulation on retail electricity prices.Energy Policy,114, pp.153-164. Wei, J., Zhao, J. and Li, Y., 2015. Price and warranty period decisions for complementary products with horizontal firms' cooperation/noncooperation strategies.Journal of Cleaner Production,105, pp.86-102.