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

By Geoff Carmody - posted Friday, 12 May 2017


At present, Australian governments are intervening to affect gas supply, and where it goes:

  • Some state governments have refused to permit the development of some (on-shore) gas deposits for various reasons.
  • Most recently, the Commonwealth Government has threatened to use export control powers to restrict the allocation of local gas production to exports from 1 July 2017.

On the face of it, the second of these is an example of governments trying to get an arbitrage-like market result (diverting more local supply to local demand to meet high local prices, with less exports into lower-priced markets).

The first is just curtailing local supply, wherever it might be sold. This behavior comes despite official advice (such as that from the NSW Chief Scientist in 2014) that:

Unconventional gas production is now a major industry especially in North America where, on balance, it is generally highly valued because of the energy security it provides. On the back of this, there is now considerable investment and experience in the development and refinement of technologies to maximise production while minimising adverse impacts. In Australia related technologies have now been extensively deployed successfully for some years (including at Camden in NSW). The independent petroleum engineering, geological and geophysical experts advising the Review consider that such technologies (including fracture stimulation and horizontal drilling technologies), with appropriate safeguards, are suitable for use in many parts of the sedimentary basins in NSW, noting that drilling in any new location is, to an extent, a learning-by-doing activity as there will always be local geological attributes specific to an individual resource development. These activities can and should be guided by companies investing in geophysics and other characterisation techniques to inform the best drilling and extraction approaches to take.
(Emphasis added.)

If the focus is on immediate market symptoms, you might want to give a tick to the second response, but a cross to the first. But does either increase supply, thereby lowering prices, over time?

All government interventions have longer term effects. Both of these responses will reduce total gas supplies over time. Instead, they increase the supply (yet more) of 'sovereign risk', both ex ante, for possible future investments, and ex post, via retrospective impacts on income flows from past investments made under a different set of rules. (Of course, if current governments don't care about anything beyond the next year or three, they probably won't give a stuff about anything but 'announceable appearances' of delivering symptomatic relief.)

Governments are at least partly to blame for the current gas market situation. The longer term effects of their policy interventions, if they are maintained, are likely to be perverse.


Is business to blame?

Maybe/don't know. Two central questions:

  • Do contractual commitments prevent market arbitrage operating right now? If so, why and how?
  • Is the policy environment right now chilling the investment climate for boosting local gas supply?
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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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