Demand and Supply of Liquefied Natural Gas in Australia

Question: Write about theDemand and Supply of Liquefied Natural Gas in Australia. Answer: Introduction Article Summary The article Malcolm Turnbull is forcing Australia's gas producers to curb local prices by Sarah Kimmorleyon 27th April 2017 demonstrates the current demand and supply of Liquefied Natural Gas in Australia. Australia is having a shortage of liquefied natural gas and hence high price for this resource. The local demand for gas among families and businesses has grown while the gas producers have not increased their supply to check on the demand. This is ironical since Australia is a net exporter of gas and yet there is a shortage in the domestic market. It is clear that the companies involved in production for local consumers are not able to supply enough to the market. The government has reservations that if the shortage continues then many businesses in Australia will be impacted adversely by high costs of production. In response to this crisis, the government has introduced a short-term regulation restricting the exportation of gas. The Directive, Australian Domestic Gas Security Mechanism, announced by the prime minister is intended to ensure that the domestic demand for gas is met before supplying to the outside community(Kimmorley 2017). This policy will come into effect on July 1st, 2017 where gas producers will function under tighter limitations on exports to guarantee that Australian households and businesses have sufficient supply of gas. Economic Analysis Demand and Supply of Liquefied Natural Gas The demand for Liquefied Natural Gas in Australia comes from both the households and the business community. The demand for this resource has since increased while the companies involved in the production for domestic consumption have not increased the supply to the market. The rise in demand can be attributed to increase in household incomes and increase in the number of businesses using gas for their production activities. Graph 1: Shortage Of Gas Quantity Families and business have increased their consumption of gas, and yet the supply is not responding to the demand rise. On the graph above the growth in demand for gas is shown by the shift of demand curve towards right from D1 to D1. The prices have increased from Pe to P1, and the quantity demanded increased to Q2. Now the amount demanded is Q2 while the amount supplied is Q1 and hence a shortage. Possible Impact of Australian Domestic Gas Security Mechanism The government has now introduced legislation restricting the exportation of the gas until the local demand is sufficiently met. If this regulation is implemented as planned, then we anticipate the supply of gas to the domestic market to increase. The increase in supply will provide a check on the rising prices and affordable to households and businesses. Graph 2: Increase in Supply of Gas When the exporting companies commence producing for the local market, there will be an increase in the supply of gas to the market. The increase in supply will make the supply curve to shift from S1 to S2. The quantity supplied changes from Q1 to Qe, and the prices drop from P1 to P2. Recommendations to the Government It is regrettable that the command did not respond on time to a gas crisis. The government has been now forced to choose between the exportation of gas and its home energy security. It has finally settled on home energy security by formulating a legislation restricting the exportation of gas. This move will only interfere with the established investments but also negate countrys net export earnings. Therefore, it is fundamental for the government to put in place measures so as to avoid a repeat of this scenario in future. The leadership of Australia should aim at increasing the supply of gas to ensure availability and sustainability. Sufficient amount of gas can be achieved in the following ways. Relax Regulations Restricting the Exploration of Gas Foremost, some states in Australia such as Northern Territory and Victoria have laws in place limiting the exploration of natural gas(Abbott 2016, p. 82). Such policies are not good for a country that aims at being a net exporter of gas and at the same time fulfilling the domestic demand. As a result, the territories that restrict the exploration of natural gas should consider relaxing the policies to permit the production of gas. Such move can be critical in ensuring that the domestic market has adequate supply and also avail surplus for export to boost the export earnings of the country. Infrastructure Development Infrastructure is a key factor to any production activity in the country. Infrastructure involved in the manufacture of gas requires a significant amount of resources which cannot be sufficiently met by the private sector(Grafton Lambie 2014, p. 510). Therefore, governments input in this area will be essential in availing the necessary support for the businesses. For instance, there is a need for construction of additional pipelines to facilitate the delivery of gas reserves to the market. With a better infrastructure in place, the costs and other challenges associated with gas production will be minimized thus availing a favorable environment for the businesses(Clark Thomson 2014, p. 89). The territories in Australia should also provide incentives to gas companies to promote the onshore gas exploration to ensure steady supplies. Additionally, the Australian competition commission should strive at improving transparency in countrys gas market to aid competition between suppliers an d information for consumers. Conclusion Despite being a net exporter of gas, Australia is experiencing a shortage of gas in its domestic market. The crisis has made the government formulate a legislation restricting the exportation of gas to the international community. While this temporary move will help restore the crisis, there is a need for the government to put measures in place to guarantee long-term certainty in the provision of gas. The first step the government should take is to develop infrastructure such as a new pipeline. The territories that have regulations restricting the exploration of gas should consider relaxing such policies. Finally, the Australian competition commission should provide the necessary support to enhance competition in the gas market. Bibliography Abbott, M 2016, The economics of the gas supply industry, Routledge, Taylor Francis Group, London. Clark, RG Thomson, M 2014, Transport Fuels from Australia's Gas Resources : advancing the nation's energy security, UNSW Press, Sydney. Grafton, RQ Lambie, NR 2014, 'Australia's Liquefied Natural Gas Sector: Past Developments, Current Challenges and Ways Forward', Australian Economic Review, pp. 509-522. Kimmorley, S 2017, Malcolm Turnbull is forcing Australia's gas producers to curb local prices, viewed 28th April 2017, https://www.businessinsider.com.au/malcolm-turnbull-is-forcing-australias-gas-producers-to-curb-local-prices-2017-4. Mokhatab, S, Mak, JY, Valappil, JV Wood, DA 2013, Handbook of liquefied natural gas, Elsevier Science, Burlington.