Cooking up a price rise

Gas prices in eastern Australia are going to rise substantially. These price rises are not driven by a lack of supply but rather by an increase in demand. Once the eastern Australian gas market is connected to the world gas market, domestic gas producers will be able to sell at the world netback price – also known as the export parity price – which is substantially higher than current gas prices.

This link will occur with the completion of the Gladstone liquefied natural gas (LNG) facilities. Gas prices will then rise and gas production will become far more profitable. Because of this it is understandable that gas companies are keen to expand production.

Wholesale gas prices will go up from around $3 to $4 per gigajoule to the world netback price of $9 per gigajoule. This is because Australian gas producers will have the option to sell to the Japanese who are willing to pay $15 per gigajoule. This doubling or tripling of wholesale gas prices is going to increase consumers’ gas bills dramatically.

Without large scale government intervention, gas prices are going to rise substantially in the next couple of years, and increases or decreases in domestic supply are going to have almost no impact on the price rise.