Economic Analysis of Liquefied Natural Gas (LNG) in Australia: 2018

This report provides an economic analysis of the Liquefied Natural Gas (LNG) market in Australia, focusing on the period around 2018. The analysis begins with an overview of a news article highlighting gas shortages in the domestic market despite abundant resources, attributing the issue to increased exports and rising demand. The report then delves into the economic factors influencing the LNG market, examining the increasing demand driven by rising household incomes, business reliance on gas, and environmental concerns, illustrated with a demand curve. It further analyzes the supply side, discussing factors such as companies prioritizing international markets, government policies restricting gas production, and insufficient infrastructure, represented by a supply curve. The report concludes with recommendations including policy changes like relaxing restrictions on gas exploration, reducing government bureaucracy, improving infrastructure, and monitoring the gas-producing companies to prevent cartel schemes. The report emphasizes the importance of LNG to the Australian economy and the need for addressing the supply-demand imbalance to mitigate rising prices and ensure energy security.

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Introduction
Article Overview
The article titled “How Australia is being screwed over its gas” by Charis Chang on 17th
March 2017 talks about the shortage of gas in the Australian market. According to Chang,
Australia has plenty of gas yet there is a shortage in the domestic market. This situation is caused
by export of gas to overseas market. The companies involved in the generation of this resource
have concentrated on shipping it to international market leaving the home market with
insufficient gas. Asia is the biggest beneficiary as it receives approximately three-thirds of gas
exports from Australia. The shortage of gas in Australian domestic market has been worsened by
the escalating demand especially in the east coast of Australia. Moreover, the supply of gas in the
east coast of Australia is dominated by only six companies meaning that there is insufficient
competition a scenario that results in higher prices for consumers (Chang, 2017).
The rising prices of gas have caused concern to several stakeholders in Australia. For
example, Australian Energy Market Operator has warned that Australia could soon be hit by
severe shortage of gas. South Australia, Victoria, and NSW are among the regions that will
encounter the shortage of Liquefied Natural Gas (LNG) by the summer of 2018-2019 (Chang,
2017). The looming gas crisis also made the prime minister to meet the companies involved in
the exploration to argue them to supply more gas locally to check on the rising prices.
Economic Analysis
The Demand for Liquefied Natural Gas

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In Australia, the demand for gas, especially in the east coast of the country, has been on
the increase in the recent years. Studies show that the surging demand is caused by several
factors. Foremost, the incomes of Australians households have been on the increase in the past
decade. In economics, we understand that the demand and income move in the same direction,
that is, as income rises, the demand for products also increases (Mankiw & Cosgrove, 2014,
p.32). This is the situation being encountered in Australian gas market. The increase in the
number of business relying on gas for their operations has also helped to amplify the demand for
this product. Furthermore, the increase in the use of gas is tied to environmental concerns. There
are ongoing efforts to persuade individuals to utilize energy that is environmentally friendly to
minimize pollution to the environment. Therefore, the Liquefied Natural Gas is providing the
solution as an environmentally friendly energy (Mokhatab et al., 2013, p.54).
Graph 1: Increase in Demand for liquefied natural gas
Price
Gas
D0
D
S
Qe Q0
Pe
P0

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On the graph one above, the rise in demand for Liquefied Natural Gas is illustrated by the
change in the demand curve from D to D0. This shift makes the quantity of gas demanded to
increase from Qe to Q0 and the price to hike from Pe to P0.
Supply of Liquefied Natural Gas
The current high prices in Australia’s gas sector are significantly caused by supply-side
factors. Foremost, the companies involved in the exploration of this resource have concentrated
on selling to the international market and thus denying the domestic market sufficient gas. A few
companies in this sector are said to be restricting supply to make the price rise for them to get
more profits. This cartel scheme is contributing to a shortage of gas to the domestic consumers
(Grafton & Lambie, 2014, p.512). Moreover, government policies in some states are also
restricting the provision of gas in Australia. For instance, Victoria has prohibited the all onshore
gas searching and production. Government bureaucracy in New South Wales and Northern
Territory is known to delay the projects and thus impeding the supply of gas to the market.
Others factors hindering the supply of gas in Australia includes insufficient infrastructure as well
as high costs involved in exploration and generation of gas (Department of Industry, Innovation
and Science, 2016).

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Graph 2: Decline in the supply of Gas
Price
Gas
The drop in supply of Liquefied Natural Gas is shown by the shift in the supply curve
from S1 to S2. As a result of this change, the quantity of gas supplied to the market declines
from Qe to Q1 while the price increases from Pe to P1.
Recommendations
Foremost, the states like Victoria should review the policies banning the onshore
exploration and generation of gas. Such policies should be relaxed to facilitate the development
of more projects that will generate sufficient gas for both local and international market. The
government should focus on the provision of a favorable environment that will support the
activities of gas exploration companies. One way the leadership can provide a good working
setting is through the development and improvement of infrastructure. For example, the
government should construct pipelines and also improve roads. Such steps will ease the
distribution and transportation of gas to the market and hence lower the cost of doing business
for the companies (Haslam Mckenzie, 2013, p.350). States like New South Wales and Northern
P1
Pe
S1
D
QeQ1
x
y
S2

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Territory should cut on government bureaucracies to speed the approval of projects. This will not
only speed the delivery of gas to the market but also act as an incentive to attract new players to
the field to increase competition.
The Australian competition commission should monitor gas producing companies to
detect and expose any cartel schemes that are likely to harm consumers. Moreover, this body
should enhance transparency in the gas sector by providing information to both consumers and
producers.
Conclusion
Liquefied Natural Gas is an important resource to the economy of Australia. Apart from
generating export income to this country, this resource is used by domestic businesses and
households. However, in the recent years, the domestic market has been significantly hit by
shortages and thus exposing the consumers to inflated prices. Apart from the escalating demand
a drop in supply has also contributed to the scarcity of this resource. Some of the factors that
curtail the supply include government bureaucracies, the ban on onshore gas exploration and
generation, and insufficient infrastructure. The government can help solve this problem by
relaxing policies prohibiting the exploration of gas, reducing government bureaucracies, and
building infrastructures like pipeline and better roads to reduce the costs involved in the
production of gas.

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Bibliography
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Chang, C., 2017. How Australia is being screwed over its gas. [Online] Available at:
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over-its-gas/news-story/4187e60617aec18e87d57453cfca0167 [Accessed 27th April 2018].
Clark, R.G. & Thomson, M., 2014. Transport Fuels from Australia's Gas Resources : advancing
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Department of Industry, Innovation and Science, 2016. Factors influencing Australia’s gas
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Paul, S., 2017. Australia gas supply crunch eases, prices still too high: regulator. [Online]
Available at: https://www.reuters.com/article/us-australia-gas/australia-gas-supply-crunch-eases-
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