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Does the Government Have a Gas Policy?

Last Thursday the government announced that it would introduce An ‘Australian Domestic Gas Security Mechanism’ which would allow it to regulate exports of gas if supply was insufficient for domestic purposes but what does this really mean?

The Prime Minister tried to explain the policy on Thursday: “Gas companies are aware they operate with a social licence from the Australian people. They cannot expect to maintain that licence if Australians are shortchanged because of excessive exports,” Turnbull said.

“Ministerial imposition of the controls will be based on advice from the market operator and regulator.

If an exporter draws more from the market than it puts in, it will have to outline how it will fill the domestic shortfall.

“The government will not prescribe how the exporter must respond, giving companies considerable flexibility in finding commercial solutions – such as swapping cargoes out of portfolios or on the spot market,” he said.

Economists are divided on whether this constitutes a workable policy.

A survey of economists conducted by Monash University and the Australian Economics Society, reported in ‘The Conversation’, found that 38% of them supported the idea of a gas reservation policy while 47% were opposed.

Those who supported the policy said that it was important to maintain energy feed stock to industry whereas those who were against government intervention took the view that the market should be allowed to adjust to the lack of supply.

However simply ensuring that there are adequate gas supplies in the Australian domestic market may not necessarily lead to cheaper prices and it is the higher prices that are likely to lead to grief on the part of household consumers and the collapse of many manufacturers.

As Matt Chambers pointed out consumers had got used to artificially low prices of $3 to $4 a gigajoule for gas before there was an export trade; now gas is being exported, the going international price is $22-$24 a gigajoule.

If $22 is the prevailing market price then suppliers which have to make up a domestic shortfall will be buying it at that price and the wholesale price is unlikely to fall below that.

However it appears that there may not be much of a shortage of gas at all.

Dale Koenders of Citi believes that it is only about 2.5% of the current domestic supply.

In these circumstances it’s likely that consumers could adjust to the shortage as the majority of economists believe.

If the government wants to reduce the wholesale price to something like $10 to $12 a gigajoule it will have to oversupply the domestic market using the reservation device.

This will result in the loss export revenue and taxation revenue for the government.

At the moment the government is having trouble explaining what the price effects of its policy will be, let alone how the mechanism will work to achieve them.

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