Finance Finance News Explained: Why Australia’s gas prices are so high
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Explained: Why Australia’s gas prices are so high

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Australia’s energy crunch turned downright nasty this week as retailers began to pass on huge spikes in gas and power prices to households – just in time for winter.

Gas, a commodity households use to warm their homes and power their stoves, has soared in price recently on the back of what’s being called a “perfect storm” in global and local energy markets.

Regulators are now capping prices in major east coast cities at $40 per gigajoule ($40/gj) to shield households and businesses from the squeeze, but the relief is only temporary.

The federal government, meanwhile, has warned efforts to limit gas exports to improve supply to the local economy are no silver bullet, conceding that Australians will experience sky-high prices for the foreseeable future.

But just a year ago gas prices were only a fraction of what they are today, so how did Australia get here? And what options are on the table to ease the pressure?

Experts said global factors, like the war in Ukraine, are partly to blame but do not account for the whole picture, with Australia’s “broken” gas market also contributing to the surging prices.

Explained: Global gas crunch

First though, let’s run through the global factors underpinning higher prices in Australia.

The first notable point is that demand for fossil fuels such as gas has been on the rise globally as nations, particularly large economies like China and India, rebound from the COVID-19 pandemic.

This is a longer-term pressure that ordinarily wouldn’t cause the run-up in prices that we have seen of late, as suppliers would usually have enough time to respond and supply more gas into the market.

But earlier this year – against the backdrop of this rising demand – Russia expanded its invasion of Ukraine, triggering a raft of financial sanctions from Europe and the United States.

This created a short-term shock, because Russia is the world’s second-largest gas producer and prior to the war supplied more than a quarter of Europe’s gas.

In other words, sanctions designed to stop the flow of Russian gas into Europe have turned an otherwise strained market into one plagued by severe shortages.

And a simultaneous global shortage of coal only exacerbated the issue, as gas is a go-to substitute for power generation in cases where coal is in short supply.

Australia’s ‘broken’ gas market

The next major factor contributing to higher gas prices is a local one.

Australia’s gas market is complex and has a long history, but experts have always questioned its efficiency.

Former ACCC chair Rod Sims previously told TND that Australia’s gas market is “broken”.

And other experts agree, with many arguing that successive federal and state governments allowed Australia’s major gas producers to book windfall profits by exporting their products before looking after locals.

Richard Denniss, chief economist at the progressive Australia Institute think-tank, said current gas prices are a natural consequence of more than a decade of failures regulating the market.

Citing research from 2013, Dr Denniss said today’s surging gas prices were predicted a decade ago, when producers started building up Australia’s export market.

“We didn’t stumble into this,” he told The New Daily.

“There is no gas shortage in Australia. We’re producing three times more gas than we used to.

“Gas giants are booking windfall profits taking care of global markets before anyone locally.”

Dr Denniss said the gas industry has spent $80 billion over the past decade building a raft of infrastructure to help it export Australian products, allowing the industry to charge higher prices for its products than would be possible locally.

But that’s also pushed up the price for local customers, because it’s made gas more scarce for households and businesses in Australia.

“When you link a small market [like Australia] to big markets, it’s inevitable what happens,” Dr Denniss said.

“The people who produce and export win, while local consumers lose.”

The ACCC has previously raised concerns about Australia’s gas industry charging the local market global prices for fuel produced domestically, as The New Daily has previously reported.

Monash University Professor Ariel Liebman agreed that local gas is being exported overseas at the expense of Australian users.

“This would all have been preventable if successive governments had paid proper attention to rigorous monitoring and regulation of all the key energy markets in Australia,” he said.

“This is a policy failure a long time in the making and it will be very hard to remedy it quickly.”

What can the government do?

Experts said unravelling more than a decade of market policy would be difficult in the short term, meaning it’s inevitable that households and businesses will feel some some financial pain in the coming months.

But there are options on the table to alleviate the squeeze and begin fixing market failures.

Professor Liebman said the most obvious option would be for the federal government to trigger a so-called “gas trigger” in federal laws that redirects gas earmarked for export to local users instead.

“In addition, the government should also seriously consider a full gas reservation policy for the entire country, similar to the one in Western Australia and the United States,” he said.

The federal government has confirmed it is considering such a move, but has warned that it couldn’t come into force before January 1 at the earliest because it would require industry consultation.

But Dr Denniss said while this may be the case, the federal government could move to pass a tax on the windfall profits being booked by gas companies in the interim, and then redirect these funds to households and businesses struggling with higher bills. The Conservative government in the UK has already done this.

“There’s nothing to stop them doing that,” he said.

“Let’s be clear: Shareholders in gas companies weren’t expecting a war in the Ukraine, so therefore shareholders in gas companies weren’t expecting enormous windfall profits, either.”