Economics of Business 1: LNG Demand and Supply in Australia Report

This report examines the impact of increasing international demand on the prices of Liquefied Natural Gas (LNG) in Australia. It analyzes the factors influencing LNG demand and supply, including global consumption, emerging economies' import forecasts, and supply-side challenges. The report utilizes demand and supply curve theory to illustrate the potential price hikes due to increased demand and potential supply shortages. It also discusses the Australian government's role in managing LNG exports and maintaining market equilibrium, suggesting strategies like taxation and subsidies. The analysis highlights the potential economic imbalances and the need for government intervention to ensure stable LNG prices in the future, supported by data and forecasts regarding LNG imports and consumption. The report concludes by emphasizing the importance of balancing global demand with domestic supply to maintain market equilibrium within the Australian LNG sector.

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Demand and Supply of LNG in Australia
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Demand and supply of a commodity can be identified as two of the major constituents
affecting the prices of the same. Precisely, the demand and supply side of commodities has also
depended on a number of factors regulating the prices to change. In this particular study, the
impact of increasing international demand for liquefied natural gas (LNG) on the prices in
Australia has been elaborated providing substantial evidence (Rudolph, 2016). According to the
reports, by 2021-22, the entire value of the LNG exports in Australia has been estimated to reach
$42 billion from $17 billion in 2015-16 (Drahos, 2017).
The report published by the Australian Government in the article ‘Resource and Energy
Quarterly’ has confirmed that due to the increase in global demand and supply challenges in the
long-term, the LNG prices in Australia have been forecasted to rise. In the meanwhile, the surge
in the future contract prices can be identified as one of the leading drivers of surging the
commodity price (Perry, 2016). On the other side, there are several risk factors associated with
supply side as well (Bolle, 2011). Due to increase in the numbers of global competitors and
reduction in the investment in the Australian oil and gas sector, the LNG projects in Australia are
anticipated to decline.
In terms of LNG demand from the global side, the international gas consumption is
expected to surge at an average annual rate of 1.7% in the next five years or so (Drahos, 2017).
Due to increased demand from the emerging economies in Asia and the European Union nations,
the LNG export infrastructure will get a boost in the Australia and US to meet the supply growth.
In the meanwhile, LNG imports forecasts till 2022 have been presented as below:

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Figure: LNG Imports Forecasts
Source: (Drahos, 2017)
As described in the figure, excluding Japan, the forecast has confirmed that the demand
of LNG is expected to increase from South Korea, China, emerging Asian economies, Europe,
and the rest of the world economies. In terms of numbers, by 2022, the consumption forecast of
LNG is expected to reach 330 billion cubic metres, up by 65%. Therefore, import of LNG in
China will rise to 48 million tonnes by 2020, up by 19% (Drahos, 2017). Evidently, China will
be the largest LNG importing nations in the world contributing towards the demand growth of
the resource in a single handed way. Furthermore, import of LNG from emerging Asian
economies i.e. India, Afghanistan, and Pakistan, etc. has estimated to increase that will evidently
benefits the Australian exports. As a result of the consequences, the prices of LNG in Australia
will maintain an upward curve in the future as well.
Irrespective of Australia being the second largest exporter of LNG across the globe, it is
expected to face a shortage of supply of natural gas in the upcoming years. According to Bruce

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Robertson (an energy specialist), the Australian Government has allowed the gas extracting
companies to sell its precious energy resources in the overseas market without considering the
future needs of the Australian people (Smead, 2015). Hence, the major consequence that can be
expected in the upcoming years is a shortage of LNG by the end of 2020. Furthermore, it is
expected that the price of LNG will increase at an unexpected rate due to its growing demand in
the international as well as domestic market and shortage of supply due to extinction of the
natural resources.
In order to explain the challenges for Australia economy regarding the price of LNG, the
demand and supply curve theory has been applied in this context. It can be seen that the increase
consciousness among the Australian consumers and development of technology will lead to a
minimum level of rise in the quantity demanded for natural gas in the future (Giri and Roy,
2011). However, the higher level of export in the current years will lead to undersupply of LNG
by a huge amount. Hence, the price of LNG is expected to increase by a huge amount in the
future. A demand and supply curve diagram has been presented below for better understanding:
Figure: Demand and Supply of LNG

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Source: (Gilman, 2016)
On the basis of the above figure, it can be seen that the huge fall in supply of LNG in the
local market will lead to a leftward shift in the Supply Curve from S to S1. In the same manner,
the increase in the quantity demanded by a smaller amount in the domestic market will lead to a
rightward shift in the Demand Curve from D to D1. Hence, the market equilibrium will shift
from E to E1 leading to an increase in the price from P to P1.
On the basis of the above analysis, it can be seen that a hike in the price of LNG will be
evident in the Australian economy, which will lead to an economic imbalance in the nation.
Chang (2017) suggest that the Australian government must put a check on the export quantity of
natural gas in order to maintain market equilibrium in the future. For example, the government
can impose a higher tax rate for export of LNG and the revenue earned from the export of the
commodity can be used as subsidies to maintain a equilibrium price in the Australian market
(Hattwick, Brown and Sailors, 2014).
The discussion in the study has identified that the global demand of LNG has estimated
to be increased at a considerable rate in the next five years. Due to continuous surge in demand
of LNG, the Australia LNG exports will be expected to reach at a record high in the near future.
On the other hand, some of the supply side challenges can play a major role fuelling the future
contract prices of LNG. Driven by the global demand growth and internal supply challenges, the
prices of LNG in Australia has recovered from US$ 7.2 a gigajoule in 2017 from a record low of
US$ 5.5 a gigajoule in 2016. The surge of the prices in LNG is expected to maintain the incline
supported by demand growth in the global market. Hence, it is important for the Australian

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Government to put a check on the production and export of LNG in order to maintain market
equilibrium in the industry.

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References
Bolle, F. (2011). Competition with supply and demand functions. Energy Economics, 23(3),
pp.253-277.
Chang, C. (2017). The raw deal Australians get over their gas. [online] NewsComAu. Available
at: http://www.news.com.au/finance/economy/australian-economy/how-australia-is-being-
screwed-over-its-gas/news-story/4187e60617aec18e87d57453cfca0167 [Accessed Aug. 2017].
Drahos, N. (2017). Resources and Energy Quarterly. [online] 5(5), pp.61-72. Available at:
https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/req/Resource-
and-Energy-Resources-Quarterly-March-2017.pdf [Accessed Aug. 2017].
Gilman, L. (2016). Economics. 3rd ed. Minneapolis: Lerner Publications.
Giri, B. and Roy, B. (2011). Supply Chain Coordination with Price-Sensitive Demand Under
Risks of Demand and Supply Disruptions. Technology Operation Management, 2(1), pp.29-38.
Hattwick, R., Brown, B. and Sailors, J. (2014). Demand, supply, and the market mechanism. 5th
ed. Englewood Cliffs, N.J.: Prentice-Hall.
Perry, J. (2016). Energy prices. 4th ed. New York: Nova Science Publishers.
Rudolph, M. (2016). Natural Gas Supply, Demand and Prices. Natural Gas, 4(9), pp.29-30.
Smead, R. (2015). Gulf Coast LNG Exports Still Moving Despite Oil-Price Decline. Natural Gas
& Electricity, 31(10), pp.28-32.