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Free markets are needed to fix the gas shortfall

Amante Abela

According to a recent report published in Nature Energy, the cost-of-living pressures arising from the Russian invasion of Ukraine last year could push up to 141 million people globally into extreme poverty. It is unquestionable that targeted energy assistance is necessary to assist vulnerable households through the energy crisis. 

Record demand for liquified natural gas (LNG) has substantially increased Australia’s domestic wholesale gas prices, which rose almost 90% between March and August last year. Currently, gas is needed to meet peak electricity demand and maintain the stability of the east coast energy system; and higher prices limit consumer spending in other areas of the economy.

In an effort to reduce prices and promote investment in renewable energy, the Albanese government capped wholesale gas prices at $12 a gigajoule last December. Some have praised the intervention as a win for consumers against giant LNG exporters who influence around 90% of reserves across the east coast. However, others have criticised it as a protectionist measure at odds with the Hawke-Keating model the Prime Minister and Treasurer insist to be following in the footsteps of. 

Australian Petroleum Production and Exploration Association chief executive Samantha McCulloch recently said to the Senate Select Committee on the Cost of Living that price controls were ‘exacerbating, not easing’ the crisis. While the Treasurer has stated that the gas market intervention is lowering electricity prices for consumers, there is no doubt that investors have been scared of committing to new projects, leaving the competitiveness of the Australian gas industry at risk. EnergyAustralia argued that high prices could only be brought down by tackling existing supply challenges, and, citing Senex Energy’s recent decision to suspend its $1bn Atlas expansion project in Queensland, said too low of a price cap would discourage investment.

It is true that Australia is facing a shortage of gas. According to the Australian Consumer and Competition Commission’s (ACCC) 2023 interim gas inquiry report, avoiding a supply shortfall is dependent on LNG producers supplying sufficient gas into the domestic market. In fact, the report suggests that without increased investment, there will be gas shortfalls from 2027 which will lead to higher prices in the domestic market. As it stands, the domestic market faces a shortage of 30 petajoules of gas this year, equivalent to approximately 5% of annual consumption.

It has been said that imposing price controls is akin to breaking a thermometer on a hot summer day. Breaking it does not make it any cooler; and capping prices does not reduce inflation. Because gas companies are not making as much money, supply falls and demand rises as consumers buy at the government-imposed price. Supply is unable to meet demand, leading to shortages. 

Moreover, although gas is a fossil fuel that produces greenhouse gas emissions, there has been increasing focus on its importance in the transition to a low-carbon world. Notably, burning natural gas produces half as much carbon dioxide for the same amount of energy compared with coal. Although gas demand in Australia will likely decrease in the long-term amid electrification, it will account for a greater component of the future global energy mix.

Regardless, while regulations and interventions help produce socially and environmentally responsible outcomes, the gas market intervention is not a balanced free market. We should remember what Adam Smith famously wrote in The Wealth of Nations (1776): ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’

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