Economics for Business: Understanding Natural Gas Prices in Australia

This report examines the increasing natural gas prices in Australia, attributing the rise to excess demand in the domestic market coupled with substantial exports. It uses microeconomic principles of supply and demand to explain the price surge and its impact on electricity bills, highlighting the relationship between natural gas and electricity as complementary goods. The analysis reveals that while domestic prices rise due to limited supply, lower prices in foreign markets drive export demand, benefiting producers but burdening local consumers. Recommendations include government intervention to regulate exports, prioritize domestic supply, and potentially subsidize electricity producers to alleviate consumer costs. The report concludes that strategic trade policies are essential to balance domestic needs with export opportunities in the natural gas sector. Desklib provides this and many other solved assignments for students.

Running head: ECONOMICS FOR BUSINESS
Economics for business
Name of the student
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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.

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Table of Contents
Introduction:...............................................................................................................................3
Newspaper analysis:...................................................................................................................3
Economic concept:.....................................................................................................................4
Recommendations:.....................................................................................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

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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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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.

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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 Río 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.

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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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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 (Blengini et 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.

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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.

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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
market return and volatility relationship. Journal of International Financial Markets,
Institutions and Money, 34, pp.41-54.
Karp, P. 2018. Australians to pay up to $430 more under uncompetitive gas market,
analysis says. [online] the Guardian. Available at:
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. LNG propelled short-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] the Guardian. Available at:
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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Trujillo-Baute, E., del Río, 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.