Gas prices are high and temperatures are low, meaning businesses and households face big electricity bills this winter.
The rising cost of gas and coal on the international market is an important cause, although Australia is a major world exporter of these two products.
The federal government has the power to intervene directly in the gas market to stimulate local supply, often referred to as its “gas trigger”.
But although gas users are pushing for price relief, the new federal government must first weigh many factors.
Why are petrol prices high in Australia?
As Europe weans itself off Russian gas and coal after its invasion of Ukraine, international demand for raw materials has increased dramatically.
Coal and gas prices here are determined by the global market, so any supplies needed outside of existing contracts are subject to volatile international spot prices.
And reliability issues at some local coal-fired power plants are also driving up gas demand, as gas-fired power plants are needed to step up and fill the gaps.
Australia may be one of the largest gas exporters in the world, but that doesn’t necessarily guarantee affordable domestic supply.
To finance the development of gas fields, resource companies must enter into long-term supply contracts from the outset.
This means that some countries are now getting gas from Australia at prices significantly lower than what can be bought here, thanks to their contracts.
In Western Australia, 15% of liquefied natural gas (LNG) available for export must be reserved for domestic use, which has been successful in keeping gas prices low.
But there is no such policy in the rest of the country, meaning eastern Australia has to import additional gas supplies – and is therefore exposed to international price shocks.
What can the government do to lower gasoline prices?
There is an emergency provision called the ‘Australian Domestic Gas Reservation Mechanism’ which, if used, would act similarly to WA’s gas reservation policy.
The mechanism was introduced by then-Prime Minister Malcolm Turnbull in 2017, giving the Australian government the ability to intervene, or use the threat of intervention, to see more gas conserved for domestic use. .
Treasurer Jim Chalmers, who has only been in the job for just over a week, is already wondering whether he will use the gas trigger to cut prices.
But he tried to avoid saying anything that might suggest such a decision.
“We’ve had general conversations with resource companies, but not about this in particular,” he said.
“Really, I just don’t want to pre-empt conversations with other ministers and with other interested parties, including regulators.”
Why does the federal government not pull the trigger right now?
The mechanism can only be used in limited circumstances, and it is not clear that current price spikes would be enough to invoke it.
Resources Minister, the new Madeleine King, is expected to determine that there will be a shortage of gas on the market next year, not just high prices.
Even then, the earliest date on which export controls could be imposed is January next year, which would do nothing to help the immediate problem of price spikes for businesses and households.
Of course, the government could rewrite the terms of the mechanism to circumvent these problems.
But there are other reasons to be careful before pulling the trigger.
If supply contracts are interrupted, it could affect Australia’s reputation as a reliable trading partner, which could have long-term ramifications for the resource sector.
And cutting off critical energy supplies to allies we support to push back Russia might not be a wise diplomatic move either.
What do gas exporters and gas users say?
The gas industry, represented by the Australian Petroleum Production & Exploration Association (APPEA), rejected the link between rising domestic prices and the export market.
APPEA Acting Chief Executive Damian Dwyer said international price volatility and power generation issues are behind the price hike, and points out that most domestic gas users were not immediately affected.
“About 85-90% of the gas market is covered by long-term contracts, called gas supply agreements (GSAs), which have been offered for this year – and blocked by many customers – at price levels of ‘about $6/gigajoule to $9/GJ,’ Dwyer said in a statement.
“The rest is covered by smaller and more volatile spot price markets which for much of this year have been around 70% below those paid internationally, remembering that some of the numbers that made headlines for the past few days were future predictions before prices were capped, not actual prices paid.”
Although the energy price hikes are described as “apocalyptic”, the Australian Industry Group acknowledges that using the gas reservation mechanism would be an “option of last resort”.
Representing some industrial gas users, chief executive Innes Willox wants to see a quick and targeted response in the short term to help vulnerable users.
“States hold many relevant levers, as do energy market authorities, energy suppliers and energy users,” he said.
“The Commonwealth’s first task is to bring us all together.”
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