Demand and Supply of LNG in Australia-Free-Samples for Students

Question: Discuss about the Demand and Supply of LNG in Australia. Answer: In determining the price of a commodity or resource, demand and supply scenario of the resource can be considered as one of the major factors (Adil, 2016). Understandably, a number of considerable factors have affected the demand and supply change contributing towards ups and downs in the price of the resource. In this particular identified study, an article by Chang (2017) has been selected describing how the price of natural gas in Australia has been affected by demand and supply side of the resource. In the recent times, Australia has been warned about gas shortage issues in the near time. Notably, Australia is one of the biggest producers of natural gas although the massive storage of the precious resource is not benefiting the Australian people. In the meanwhile, Bruce Robertson, an energy specialist, has stated that Australia has allowed gas producing companies to dig up the precious energy resource and sell it at the overseas market without considering the requirement of the Australian citizens (Rimos, Hoadley and Brennan, 2015). As a result of the consequences, the Australians may have to deal with the issue of the supply shortage of natural gas by 2018-19. Due to the shortage in supply, the price of the precious resource is expected to rise at a considerable rate affecting the expenses of household and industries (Bhattacharyya, 2017). Currently, Australia has been identified as the second-largest exporter of LNG contributing 12 percent of the global natural gas. By 2020, analysts have expected that the economy will be the biggest natural gas exporting nation (Chang, 2017). Contradictorily, the Australian Energy Market Operator has warned that such high volume export of LNG can create the shortage of natural gas for own use of Australia. Apparently, though the reserve of natural resource in Australia is massive, the heavy international demand can push the exporting nation to supply maximum volume. Therefore, the domestic supply of LNG may face shortage as the local demand is also creeping up. Effectively, as the Australian companies are making more money by selling LNG at the international market, they are continuously ignoring the future domestic demand for natural gas in Australia (Hatamian, 2016). Evidently, the reserves of the natural gas are consuming too thick and fast. Also, the domestic prices of LNG have been affected by the global export. Due to the robust international export demand and shortage in domestic supply, prices of natural gas will surge at a considerable rate. Lately, the LNG producers in the major territory are offered contracts at a price of $20 per gigajoule that is five times greater than the historical average price of $4 (Chang, 2017). In the meanwhile, lack of major competition among the domestic LNG producers can also contribute towards higher prices of natural gas at the domestic level. According to Chang (2017), the demand for LNG will increase in the upcoming years due to the eco-friendly characteristics of the fossil fuel (Chang, 2017). As per study, it has been found that LNG release less carbon as compared to any other fossil fuels such as petrol and diesel. On the other hand, the increased consciousness among the consumers will increase the demand for LNG in the upcoming years. Furthermore, a shortage will be evident in the upcoming years that will negatively impact the equilibrium price level of LNG in the Australian market. By applying the theory of demand and supply, it can be seen that the development of technology and increased consciousness among the consumers will lead to a small increase in the quantity demanded for LNG in the upcoming years. Alternatively, the high amount of export in the recent years will finish up the natural resources of LNG leading to a huge amount of deficit in the supply of the commodity (Bolle, 2011). In order to explain the future prospects of LNG in the Australian market, a demand and supply curve has been presented below with detailed discussion: Figure: Source: (Forstater, 2017) It can be seen through the above diagram that the increase in quantity demanded for LNG will lead to a rightward shift in the demand curve from D to D1. On the other hand, the deficit in quantity supplied will result in a leftward shift in the supply curve from S to S1. Hence, the market equilibrium will change from E to E1 resulting in a rise in the price of LNG from P to P1. Furthermore, it is important to note that the demand for LNG is inelastic in nature. Hence, a rise in the price of LNG will have minimum impact over the quantity demanded of the commodity. For instance, an increase in 30 percent of the price will lead to a change in only 10 percent of the quantity demanded. Therefore, the elasticity of demand of LNG is less than one that presents the inelastic demand of LNG. Figure: Inelastic demand for LNG Source: (Forstater, 2017) On the basis of the above analysis, an increase in the price of LNG will not have a negative impact over the quantity demanded by a higher amount. Rather, the demand for LNG will increase in the upcoming years. Hence, the Department of Environment and Energy in Australia needs to take necessary steps in order to control the export of LNG in the current market scenario. For example, the government can increase the tax rate on export of LNG in order to control the oversupply in the global market (Gilman, 2016). It will help the Australian government to control the over-export of LNG and keep the natural reserve safe for future exploration. As per the analysis, massive export of LNG can be identified as one of the major reason for the shortage of LNG in the domestic market in Australia. According to the prediction of the analysts, the massive demand for natural gas in the international market has been utilised by the LNG producing companies operating in Australia to increase their profits. As a result of consequences, the supply of LNG has been shifted towards global market forcing shortage of the resource at the domestic level. Therefore, the inclining domestic demand and long-term shortage worries of LNG in Australia is fuelling the prices of the resource References Adil, J. (2016).Supply and demand. 3rd ed. Mankato, Minn.: Capstone Press. Bhattacharyya, S. (2017). Energy sector management issues: an overview.International Journal of Energy Sector Management, 1(1), pp.13-33. 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: https://www.news.com.au/finance/economy/australian-economy/how-australia-is-being-screwed-over-its-gas/news-story/4187e60617aec18e87d57453cfca0167 [Accessed Aug. 2017]. Forstater, M. (2017). Economics. 3rd ed. London: A. C. Black. Gilman, L. (2016). Economics. 4th ed. Minneapolis: Lerner Publications. Hatamian, H. (2016). Natural-Gas Supply-and-Demand Problems.Journal of Petroleum Technology, 50(01), pp.58-63. Rimos, S., Hoadley, A. and Brennan, D. (2015). Resource depletion impact assessment: Impacts of a natural gas scarcity in Australia.Sustainable Production and Consumption, 3, pp.45-58.