Soaring gas prices are hitting Australian households and businesses hard. It is the country’s reliance on dirty, expensive fossil fuels that is responsible for these eye-watering prices, according to the Australia Institute. Gas producers are enjoying windfall profits while billpayers are exposed to volatile global prices.

The government is responding by approving new gas projects in Australia. But when expensive gas is the source of the crisis, this plan is risky. “Australians are paying the price for a decade of chaotic energy policy, an obsession with keeping coal power stations running and doubling down on gas”, said Richie Merzian, Climate and Energy Program Director at the Australia Institute. Instead, the government needs to reduce the country’s gas dependence to protect it from the volatile global market.

Why are Australian natural gas prices so changeable?

Natural gas is Australia’s third-largest energy resource. Traditionally, gas fields in the southeast of the country supplied the fuel to households and businesses at an inexpensive rate. For example, ExxonMobil’s and BHP’s Bass Strait gas fields off Victoria could provide as much as 40 per cent of the east coast’s demand. 

However, these supplies are now in rapid decline. Today, most of Australia’s gas comes from Western Australia and Queensland. This is far from domestic demand centres in Victoria, New South Wales and South Australia. It puts gas users in these states at risk of winter gas shortages as soon as 2023, according to the Australian Energy Market Operator. 

Natural gas exports

Therefore, it seems ironic that Australia is also the world’s largest exporter of liquefied natural gas (LNG). LNG is natural gas, cooled down to liquid form at -160°C. This transformation makes it easier to transport by ship in thermally insulated LNG tankers. Japan, South Korea and China are Australia’s top LNG export destinations. Australia’s total LNG shipments hit 77.5 million tonnes and were worth about AUD $49 billion in 2019. 

However, these exports come at a steep price for both domestic consumers and the environment. Gas bills for Australians on the east coast have been linked to LNG export prices since 2015. Local gas producers have the option to sell the fossil fuel abroad or to the domestic market. This has made Australian gas prices increasingly volatile as they follow international boom-and-bust market cycles.

How much have natural gas prices fluctuated in Australia in the last decade?

Gas prices in 2015 to 2019

Historically, gas prices on Australia’s east coast have been between AUD $4 and $6 a gigajoule (GJ). But exporting so much of the product abroad forced domestic prices up above AUD $10 per GJ. Producers had no incentive to sell cheaply to the home market once they had the option of more expensive foreign customers. They also began to tap more expensive sources of gas to meet the new demand.

Gas prices in 2020

Then, in 2020, gas prices fell to their lowest level since 2015. This drop to below AUD $6 per GJ in all markets is partially attributed to the COVID-19 pandemic, which reduced demand. It is also connected to record low oil prices, the result of both COVID-19 and a price war between Saudi Arabia and Russia. Nevertheless, domestic prices remained higher than export parity. This demonstrates the effect that LNG exports have on Australian gas prices.

Gas prices in 2021

Unfortunately for gas consumers, the price decrease did not last for long. On the contrary, spot gas prices in Victoria reached AUD $20 per GJ on July 6, 2021. That is the highest rate since June 27, 2016. 

Other east coast states reported similarly extortionate rates. For instance, AUD $18.20 per GJ at the Wallumbilla hub, Queensland, AUD $15.44 per GJ in Sydney, AUD $14.79 per GJ in Adelaide and AUD $14.39 per GJ in Brisbane. Various factors are responsible, including a high winter gas demand and a spike in international gas prices.

Gas prices in 2022

Russia’s war in Ukraine once more demonstrates the volatile nature of gas prices. Wholesale gas prices averaged AUD $10 per GJ from January to March 2022, setting a new record for the quarter. Prices kept rising, averaging almost AUD $30 per GJ in the second quarter across many Australian states. This was almost triple the previous price record of AUD $10.74 per GJ set in the September quarter of 2021. 

Electricity and gas: How has this affected gas usage in Australia?

From 2014 to 2020, Australia’s use of gas has fallen by 21 per cent. It is now cheaper to use electricity to heat homes, heat water and cook food. This has led to a rapid decline in gas usage in gas-fired power plants by 58 per cent since 2014. Renewables are replacing fossil fuels’ contribution to the National Electricity Market.

What are the repercussions of gas price volatility?

As Australia’s gas usage plummeted, there were significant repercussions for the industry and those that work in it. The price drop in 2020 resulted in the oil and gas industry cutting more jobs than any other area of the economy. 40 per cent of its employees lost their livelihoods between March and April 2020.

Other areas of Australia’s economy have also been affected by high gas prices and less gas usage. For example, in 2019, multinational chemical corporation Dow shut down its plant in Melbourne. The rising price of gas was a key factor behind the closure. Likewise, RemaPak, a Sydney-based company, went bankrupt in the same year. It blamed a four-fold increase in its gas costs for its insolvency. 

What else affects the volatility of Australian gas prices?

Another key issue facing Australia’s natural gas industry is the harm their product has on the environment. Energy providers have marketed natural gas as a ‘cleaner’ energy source than coal and oil. They highlight its 45 to 55 per cent lower greenhouse gas emissions than coal when used for electricity generation. Fossil fuel giant Shell also emphasises that replacing coal with gas results in significantly less air pollution.

However, natural gas is still a fossil fuel. It releases some carbon dioxide (CO2) when it is burned. Moreover, the extraction, production and use of natural gas also release methane, another greenhouse gas. 

Methane emissions

Methane is actually over 80 times more potent at warming our planet than CO2 over the first 20 years it is in the atmosphere. Over a period of 100 years, methane has 28 to 36 times the global warming potential of CO2. It is thought to be responsible for at least a quarter of today’s global warming.

In recognition of the harm fossil fuels are causing to our planet, many countries around the world are committing to reducing their greenhouse emissions. Australia’s three biggest LNG customers – China, Japan and South Korea – have agreed to achieve net-zero emissions by 2060 or 2050. This will reduce demand for Australia’s LNG and risks making investments in the gas industry stranded assets. Indeed, in 2021, 65 per cent of Australian investors said that they would increase investment in renewables over the next couple of years.

Renewables: The new energy provider?

In 2021, renewables produced 32.5 per cent of the energy in Australia. Meanwhile, gas has been in decline in Australia since 2014. The Australian government may want to return to the ‘good old days’ of AUD $4 per GJ. But, even the gas industry realises that this is a fantasy.

A massive new coal seam gas project is under development in Narrabri, New South Wales. Analysts forecast that the cost of its gas will not fall below AUD $8 per GJ. Meanwhile, renewable energy is cheaper than electricity from new-build coal or gas-fired power stations in Australia. And this will continue to be the case. By 2030, electricity from wind and solar will cost about AUD $40 per megawatt-hour (MWh). This is significantly less than the AUD $70-90 per MWh price range from new coal and gas power plants. Even if the calculations add transmission and storage costs, prices would be less than from new coal and gas generation.

Overall, there is a growing and long overdue trend towards replacing fossil fuels with renewables. Investment funds, banks and insurance companies are all declaring environmentally friendly policies that will see them “increasingly questioning and sometimes abandoning gas along with coal”. Why would anyone invest in volatile fossil fuels like gas when cheaper, cleaner and renewable energy sources are available?