The Australian gas crisis redux

From Oxford Economics:

In 2017, a gas crisis emerged in Australia’s East Coast gas market. Gas prices had increased rapidly from mid-2016 as the full effect of the three LNG projects starting operations on Curtis Island worked through the gas market, putting domestic energy users under pressure. In March 2017, the Australian Energy Market Operator (AEMO) forecast gas shortages in coming years, potentially leading to blackouts and industrial closures. While gas shortages are no longer forecast, challenges in the East Coast gas market remain.

Building on their co-authored paper ‘Prices and crisis: LNG and Australia’s East Coast gas market’ that was published by the OIES in March 2018, David Ledesma and Nikolai Drahos discuss recent developments in Australia and the challenges ahead. They cover the reasons behind the recent crisis, why the world’s second largest LNG exporter may soon become an importer, and parallels with Oman and Egypt.

Podcast here.

A good assessment of the state of things except in one crucial respect. OIES does not understand that LNG imports will increase prices because the ADGSM sets prices at export net-back. LNG imports can only be higher given they include the price of liquifaction, shipping and regasifaction versus simple local production (net-back). It also exposes the nation to staggering forex risk.

Gas imports will simply set the marginal cost higher for the domestic market and the export cartel will only sell at that price henceforth. When any external shock comes there will a renewed energy shock as the AUD crashes and gas prices skyrocket. Recall as well that gas sets the marginal cost of electricity. It’s complete lunacy.

Domestic reservation is the ONLY solution.

Comments

  1. Domestic reservation is the ONLY solution.

    But, but …. wouldn’t that bring prices down and give us breathing room for an orderly transition from coal (and gas!) to renewables? Whose interests would that serve, other than the Australian public and the global population? Does it make ________ (fill in name of greedy coal magnate and LNP donor) any richer? No? Begone!

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