Australia’s worsening East Coast gas crisis

Andrew Munro 14 March 2017 NEWS

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As gas prices skyrocket, both homes and businesses are set to take a hit.

When faced with the specter of sharply rising gas prices, a lot of households made the decision to switch off or switch away for good, with it no longer being a cost-effective option. A lot of businesses, however, don't have that option. There are a lot of industrial companies in Australia for whom gas represents as much as 40% of their costs.

Based on data from Department of Industry commissioned reports, and predictions from the 5th Annual Australian Domestic Gas Outlook conference in 2017, here's what we can expect from wholesale gas prices as soon as this year. Here East Coast average refers to prices for NSW and Victoria alone.

Wholesale industry gas prices almost doubled between 2015-2017, and are now set to increase by even more in a much shorter time.

It's worth noting that if anything, the "predicted upcoming average" is a conservative estimate, as it's already the price reality for many industries who are being offered wholesale gas spot prices of $20/GJ, when they're being supplied at all. Prices are set to rise much faster than anyone predicted, largely as a result of the lack of diversity in the market, and the "triple whammy" of circumstance and decision-making that's upended everything.

The triple whammy to gas prices

Three factors in tandem have struck the market.

  • The introduction of LNG changed gas flows and the domestic market
  • Oil prices fell further and faster than predicted, leading to withdrawn investments and holding back gas exploration
  • Regulatory uncertainty and exploration restrictions are delaying the introduction of new gas supplies

All of these in combination are causing prices to rise higher, and faster, than many businesses anticipated.

What it all means for consumers

Obviously residential gas users can expect price hikes as well, especially as gas supplies that were previously destined for residential use are diverted to businesses that depend on it, and are willing to pay more. The other carry-on effects, however, may be more severe.

With so many mining industries, chemical operations, construction materials producers and many more depending on gas supply, it's possible that prices will rise across a range of industries that depend on the materials, driving prices up across construction, manufacturing and more. Meanwhile, the necessary cost cutting may take the form of layoffs and withdrawn ventures that may otherwise have created a lot of jobs.

Similarly, overseas businesses looking to open operations in Australia may be turned away by the high, and largely unpredictable, cost of industrial gas.

In the words of Mr Sims, Australian Competition & Consumer Commission chairman, "The outlook for gas supply is now even worse than it was a year ago; indeed, our worst fears are being realised."

There's no telling what might happen going forwards, whether state or federal policies will do any part to help mitigate it, whether Australia's gas exports will slow to help ease the burden and what it all means. At the very least, however, it might be time for home gas users to start bargain hunting for alternative better plans.

If you're looking forward to construction or renovation, fixed rate construction loans might also be a way of securing rates against the current market. Similarly, vacant land loans might be an effective way of snapping up a desirable lot without needing to start investing in construction right away, with materials prices and therefore building costs looking uncertain.

For SMEs, especially those who might depend on affected materials or gas supplies, it might be a good idea to re-examine your current financing, such as by looking into a flexible line of credit rather, and casting a wider net than just the big banks to find a more effective deal.

What's going to happen, and how Australian businesses will or won't adapt is still anyone's guess.

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