Cooking up a price rise: a report on gas price increases by The Australia Institute

According to a recent report by The Australia Institute gas prices in eastern Australia are going to rise substantially and its the fault of the gas industry itself.

The report, titled Cooking up a price rise finds that the Coal Seam Gas industry is attempting to paint the blame for gas price increases on green and community groups and our collective efforts to prevent coal seam gas mining taking place across our lands when in fact price increases are a direct result of the mining industry’s expansion and push for exportation of gas for sale in overseas markets.

In the report The Australia Institute says “These (gas) price rises are not driven by a lack of supply but rather by an increase in demand. Once the eastern Australian gas market is connected to the world gas market, domestic gas producers will be able to sell at the world netback price – also known as the export parity price – which is substantially higher than current gas prices.

This link will occur with the completion of the Gladstone liquefied natural gas (LNG) facilities. Gas prices will then rise and gas production will become far more profitable. Because of this it is understandable that gas companies are keen to expand production.

Wholesale gas prices will go up from around $3 to $4 per gigajoule to the world netback price of $9 per gigajoule. This is because Australian gas producers will have the option to sell to the Japanese who are willing to pay $15 per gigajoule. This doubling or tripling of wholesale gas prices is going to increase consumers’ gas bills dramatically.

Ironically it is not a lack of supply that is going to drive up gas prices but, rather, the introduction of CSG as a new form of supply. Without this additional supply it is unlikely that gas  production  would  have  been  large  enough  in  the  eastern  market  to  justify  the construction of LNG facilities.

 This higher price has made the gas industry eager to increase its supply; gas is about to become far more profitable. In particular it has been attempting to expand coal seam gas (CSG) exploration. Public concern about extracting CSG has meant that, in New South Wales, further restrictions have been placed upon the location of CSG wells. This has upset the gas industry, but its claims that restrictions on CSG production are the cause of price increases are not correct. Increases or decreases in domestic gas supply will have almost no impact on the price of gas. Once the eastern Australian gas market is linked with the world market, domestic gas prices will be subject to movements in the world price and domestic production will have little influence on price.

With gas becoming far more profitable, it is not surprising that gas producers are keen to expand their supply. Their strategy of blaming CSG restrictions for coming price rises is designed to turn public support against those restrictions and increase pressure on the New South Wales  state government  to  remove  them.  But these  claims  are  little  more  than posturing and bear no resemblance to what is actually happening in the market.

If business or government are serious about attempting to prevent or substantially reduce the rise in gas prices there are few options available to them. A gas reserve policy similar to the one in Western Australia could work. There would be implementation problems due to the fact that the eastern gas market is made up of five states and one territory that would all have to agree. The Commonwealth government could also introduce restrictions on the export of gas.

Without large scale government intervention, gas prices are going to rise substantially in the next couple of years, and increases or decreases in domestic supply are going to have almost no impact on the price rise.

The Australia Institute is an independent public policy think tank based in Canberra. It is funded by donations from philanthropic trusts and individuals, memberships and commissioned research. Since its launch in 1994, the Institute has carried out highly influential research on a broad range of economic, social and environmental issues.

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