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Jumpin’ Jack Flash? It’s ‘bout gas, gas, gas!

By Geoff Carmody - posted Friday, 12 May 2017


This could be a big deal.

We've long traded on our rich endowments and comparative advantage in energy.

Is our gas situation unusual?

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Very. Consider some examples.

The way market arbitrage should work: real examples

Some countries (including some OPEC members and developing countries) subsidise local energy input costs to support (protect) local business and consumers. In such cases, export prices exceed after-subsidy local prices, sometimes substantially. But export and pre-subsidy local prices converge because of arbitrage: it's the subsidy that drives the lower local price (and costs the local government budget heaps).

In Australia, there have also been periods where export prices have well exceeded local prices (eg, for beef). In such cases, supply shifted – quite sensibly – from local markets to exports, and local prices were pushed up towards the international market price. That's also arbitrage in action.

Australia's import parity pricing policy for local oil supplies broadly reflects what arbitrage would deliver. Without it, local oil supplies (if priced lower when delivered here) would migrate offshore until local prices approached world prices, delivering a similar market price result.

The antithesis of market arbitrage: two absurd examples; one hypothetical, the other real

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If you sold your house to a buyer offering only 40%-45% of the highest bid price, other sellers, most buyers, (and obviously your real estate agent!), would think you stark raving mad, or, at least, a bit 'unusual'.

The current local gas market seems to be like this: mad or at least 'unusual'. Why isn't the local gas market working properly? Is it government failure or market failure – or both?

Are governments to blame?

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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