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According to Bowen and Sosa (2014), demand determines the amount of product a consumer is willing to be at a certain price. It measures the consumer's willingness and ability to pay for that product. The demand for a product depends on various other factors such as price of the commodity, the price of related goods, tastes, and preferences of the buyer and future expectations. The law of demand states the negative relationship between the demand for a product and its price, other factors remaining constant. By illustrating the law of demand on a graph, a negatively sloped demand curve is perceived. As per Petroff (2013), supply determines the amount of product a producer or seller is willing to sell at a particular price. It measures the producer's ability to sell the product at a certain price. Supply of a product depends on various factors such as the price of the goods, the cost of inputs, goals of the firm, technology used, future expectations, etc. The law of supply states the positive relation between the price and supply of a good. The law of supply depicted on a graph results to an upward sloping supply curve.
This essay deals with the excess supply of Liquefied Natural Gas (LNG) in Australia with a decrease in demand. A detailed analysis is done by the information provided by the International Energy Agency (IEA). This agency is the independent energy advisor to the developed OECD nations. According to the survey, Australia has an excess supply of LNG in the forthcoming years, whereby, there is a fall in demand of the same. This excess supply and reduction in demand lead to a fall n price of the product (ABC Rural 2016).
According to International Energy Agency (IEA), there would be a deceleration of consumption in liquefied natural gas between 2016 to 2021. Prior six years to this issue, it was noticed that there was a 2.5% rise in the demand for gas and the previous decade noticed a 2.2% increase in demand. This gave the producers a hope towards the golden age of high demand and increment in prices in this field. It would ensure massive investments to be made globally in such an industry (Iea.org. 2016).
Australia, to overcome the foreseen rise in demand, sanctioned four out of seven big LNG plants. This would almost double the current production of the gas by the year 2021. On a bitter note, this increase in the supply of LNG is responded by a reduction in demand. The future expectations for the rise in demand seem to be at fault. Hence, leads to an excess supply of LNG, and a reduction in demand. It leads to a fall in the price of the goods. This issue is illustrated in figure 1.
Figure 1: Changes in demand and supply curves of LNG
(Source: as created by author)
According to figure 1, initial demand and supply curves for LNG is D1 and S1 respectively. They intersect at their equilibrium point, and the corresponding equilibrium price is P1, and the equilibrium quantity is Q1. After sanctioning four LNG plants, the future supply of the product almost doubles the current supply. This is shown by an increase in the supply curve, a rightward shift from S1 to S2. Further decrease in demand for energy for the availability of renewable sources, cheap coal, and less energy intense consumers, the demand curve, shows a leftward shift from D1 to D2. The shift in supply curve is more than the shift in demand. The new equilibrium point is achieved where D2 and S2 intersects. This results in a significant drop in the price of LNG from P1 to P2 and a slight increase in equilibrium quantity from Q1 to Q2 (Case, Fair and Oster 2012).
The factors affecting the reduction in demand for LNG is based on the availability of renewable sources of fuel. People have become more conscious regarding the depletion of nonrenewable resources. They have abided cost effective measures of using solar, wind, water energy. These natural sources is helping them to sustain the environment, hence, there in a reduction in demand for LNG. Secondly, the cost of coal is cheaper than the cost of consuming LNG. Coal acts as a substitute for the fuel, thereby prices of related goods have left a negative impact on the demand for the gas. Moreover, with the return of nuclear power availability, there is a reduction in the supply of demand for LNG (Twidell and Weir 2015). Lastly, the reduction in demand is also a reason for the change in tastes and preferences of the consumer. The consumers have become less intense regarding the consumption of energy.
As stated by Weems and Hwang (2013), the factors affecting the increase in the supply of LNG depends on upon the enhance in the technology used in production. Australia has planned to increase its production of LNG by sanctioning four LNG plants. This would double the production of LNG by the year 2021. Approximately, the production would increase from 80 billion cubic meters to 153 billion cubic meters. With the growth in demand for LNG in the past decade, the future expectations of the producers in this field rose.
The scenario leads to a situation of excess supply, where the buyers are negotiating contracts to lower the price and volumes and pushing the supply to the spot market. There is a noticeable 75% fall in the price of LNG.
The aim of this essay was to analyze the market scenario of Liquified Petroleum Gas (LNG). The increase in demand for gas in the last decade made the producers expect a golden era for LNG in the coming years. The supply would be almost double in the forthcoming years. Whereas, a change in the tastes and preference, decrease in the price of substitutes and new methods have resulted in a reduction in demand for LNG. This increase in supply and reduction in demand leads to a great fall in the price of LNG. all the future expectations of the producers have acted contradicting (Le and Phillips 2015).
To overcome such a scenario, LNG plants should run below the capacity level, so that they do not produce more than demanded. Production should march with the demand. Current profit would not be assessed by the market, but to maintain net profit, cutting down supply is the need of the hour, irrespective of the enhancement in technology. The goal of the firm must be to reduce the excess supply.
ABC Rural. (2016). LNG glut will continue for years as demand falls and supply surges: IEA. [online] Available at: http://www.abc.net.au/news/2016-06-09/lng-glut-will-continue-as-demand-falls-and-supply-surges/7494850 [Accessed 30 Aug. 2016].
Bowen, W.G. and Sosa, J.A., 2014. Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press.
Case, K.E., Fair, R.C. and Oster, S.M., 2012. Principles of economics. Prentice Hall,.
Iea.org. (2016). Homepage. [online] Available at: https://www.iea.org/ [Accessed 30 Aug. 2016].
Le, L. and Phillips, J., 2015. LNG: An emerging transport fuel. Energy News,33(4), p.15.
Petroff, J., 2013. Demand and Supply.
Twidell, J. and Weir, T., 2015. Renewable energy resources. Routledge.
Weems, P.R. and Hwang, M., 2013. Overview of issues common to structuring, negotiating and documenting LNG projects. The Journal of World Energy Law & Business, p.jwt016.
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