Demand and Supply of Oil & Gas in Australia

Question: Discuss about theDemand and Supply of Oil Gas in Australia. Answer: It was reported in the Financial Review in 2016 by Josh Frydenberg that oil prices in Australia are beyond the governments control, and hence to sustain, there is a need to concentrate on the cost of doing business there. The worldwide oil and gas sector, not unknown to uncertainty, is undergoing substantial downward pressure on prices as the supply is growingly outstripping demand. Prices have plummeted from $140/barrel in 2008 to $30 in 2016. Balance sheets of organizations have been hit hard and important oil-producing nations have had their credit ratings downgraded. Such new phase of low expenditure and falling oil and gas prices is having considerable effect on Australia. First impact is on earnings. As Australia is the soon to be biggest LNG exporter across the world, it is impacted by lowering oil price because this is used as a standard for longer term gas contracts. While the lower value of Australian dollar offsets the impact to some degree, the $49 billion the country is likely to earn yearly from these exports from 2020 would be significantly higher if the oil prices sprang back to previous highs (Frydenberg, 2016). Secondly, the decrease in expenditure on exploration is impacting the pipeline of upcoming projects in the country and the consequent employment levels that were initially projected for the sector. The main stakeholders to this issue include the Australian government because this impacts its import and export decisions, and the public and the companies as due to the low oil prices, the transition to renewable sources of energy has slowed down because individuals and companies are encountering the new cost-benefit dilemma which needs higher subsidies to mend the cost gap (Frydenberg, 2016). The burning question here is that why oil and gas, a sector not unaccustomed to instability, is experiencing such critical downward pressure on price? The answer is an intricate blend of demand and supply dynamics. The law of demand and supply mainly impacts the oil sector by determining the oil price. The expectations about the oil price and its actual price are the crucial determining variables in how firms in the oil sector apportion their resources. Prices form certain incentives which influence behavior: such behavior ultimately adds back to the supply and demand for determining the price of oil (Lee, 2015).For instance, long periods of high oil prices result in customers discarding non-fuel efficient vehicles, hence mitigating their driving. Individuals and businesses might pay higher attention to conserving energy because of its high cost. Due to such factors, demand falls. On the supply end, higher oil prices result in more drilling projects; greater RD money comes in and lea ds to innovation of novel efficiencies and techniques; and several projects that are not feasible at lower prices turn feasible. Due to all such activities, supply increases. Every day nearly 94 million barrels of oil is consumed in the world (Morgeraand Kulovesi, 2016). This is an increase from 84 million barrels only over ten years ago as a mushrooming middle class, population increase and fast urbanization have gradually elevated the demand. However, what has altered more radically than demand is the supply of oil, with more than 96 million barrels per day now being generated. Likewise, lower oil prices create the opposite suite of incentives. Production falls as several firms in the oil sector might declare bankruptcy and development projects are shut down. This damages supply extremely. Demand also increases as public drives more and emphasis on efficiency is less material owing to lower energy costs.For instance, the joint venture partners have postponed their investment decisions on the $40 billion Browse LNG project in Western Australia mentioning the existing price environment (Pedigo, 2016). Australias oil production is projected to fall from 183 million barrels in 2008 to 83 million barrels in 2030. Simultaneously as production is reducing, the requirement for oil in the country is projected to rise from 341 million barrels in 2008 to 474 million barrels by the year 2030. The overall implications for the country of the widening gap between supply and demand may be very critical if measures are not taken to deal with it in the near future (QER, 2013 ). (Source: QER, 2013) Oil, in the long run, is as purely elastic a product as there is, each movement on the generation and consumption ends reflected in its price. Oil is always in great demand and has abundant availability, rendering its price hugely a function of market forces (Cully, Thomas, and Whitelaw, 2016). Such current dynamics highlight the need for the Australian government to pay attention to what it can control reducing the cost of doing business as a way of amplifying the countrys competitiveness. Higher labor market suppleness, streamlined legislative procedures, and productivity supporting infrastructure projects are critical. Promoting innovation, big data analytics and automations, plus de-risking exploration by the provision of government produced geological mapping are also significant. As far as the oil and gas firms of Australia are concerned, they are recommended to think broadly and tap the Asian customers, quickly develop their business models, and become proactive to the emerging trends, if they intend to prosper in a dynamic international marketplace (IBP Inc, 2013). No other country in the world could serve the South-East Asian market better than Australia, especially pertaining to LNG. The LNG players of Australia will likely require to be more practical to stay co mpetitive in Asia they will have to grow closer to the consumers and build capabilities to serve the commercial and retail markets of the region. Key to this will be to comprehend the functioning of the commercial and distribution aspects of the LNG market in Asia, and turning more of a market maker than a market taker. Strategic alliances and joint ventures are likely to create a strong plank in future strategies for the Australian companies (Griffinand Steele, 2013). At the end, the oil and gas market of Australia will identify its equilibrium. High costoil producers will be taken out and demographic trends will continue increasing demand and drilling expenditure will recuperate in response. Australia, as an innovative and reliable supplier, will stay resilient in light of such challenges. References Cully, M., Thomas, N. and Whitelaw, D., 2016. Factors influencing Australias gas supply and demand. Australian Government. Frydenberg, J., 2016.Oil industry slump means Australia has to boost productivity. Financial Review. [Online]. Available through: https://www.afr.com/opinion/oil-industry-slump-means-australia-has-to-boost-productivity. [Accessed on 19th April 2017]. Griffin, J. and Steele, H., 2013. Energy Economics and Policy. Elsevier. IBP Inc. 2013. Australia Oil, Gas Resources and Exploration Handbook Volume 3 South Australia - Strategic Information and Regulations. Lulu Press. Lee, J., 2015. What impacts the price of Natural Gas? [Online]. Available through: https://www.croftsystems.net/oil-gas-blog/what-impacts-the-price-of-natural-gas. [Accessed on 19th April 2017]. Morgera, E. and Kulovesi, K., 2016. Research Handbook on International Law and Natural Resources. Edward Edgar Publishing. Pedigo, E., 2016. Australia Has Rich Gas Reserves, But Faces Supply Crunch. [Online]. Available through:https://www.epmag.com/australia-has-rich-gas-reserves-faces-supply-crunch-1249626#p=2. [Accessed on 19th April 2017]. QER. 2013. Australias oil supply and demand.[Online]. Available through:https://www.qer.com.au/understanding/need-new-fuels/australias-oil-supply-and-demand. [Accessed on 19th April 2017].