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Market Failure in Gas and Oil Market

15 Sept 20244 min read

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Australia’s Oil Industry

  • Australia produced 334.737 barrels of oil a day in Dec 2021, and the oil and gas industry has continued to grow with 24.9% growth over the past 5 years
  • Currently Australia’s oil and gas industry are worth 163.8 billion in 2023

a) Externalities in Gas and Oil Market in Australia

Negative Production Externalities

  • Welfare/deadweight loss involving reduction of social benefits due to overallocation of resources
  • In this case, if the amount of oil/gas production was reduced, there would be less pollution, and less negative environmental effects. Thus, we can say that a reduction of social benefits is caused due to overallocation of resources
  • Woodside produced 66 million tonnes of carbon dioxide in 2022, accelerates greenhouse effect, causing
    • Global temperatures to rise
    • Rising sea levels
    • Increased droughts
    • Stronger storms
    • More poverty and displacement
    • This climate change has affected the Great Barrier Reef negatively and is expected to affect it the most in the future
  • Drilling and mining for oil and gas on the east coast is disturbing the Great Barrier Reef and wildlife
    • Will eventually negatively affect tourism
    • Negatively affects wildlife, and maybe divers/swimmers
    • Woodside is planning to mine for oil/gas on the east coast, potentially affecting the Great Barrier Reef and wildlife
  • Environmental pollution, e.g. oil spills, carbon emissions
    • Oil spills: 140 oil spills in Australian waters in 2008-2009, kills fauna and flora either physically (inhibits movement), or by poisoning them (toxicity)
    • A tanker carrying 33,000 litres of used oil rolled over on Great Northern Highway on July 30 spilling 28,000 litres of oil into the local environment, 40 km south of Mount Magnet (north east of Perth)
      • The oil spilled into a creek where dead birds and turtles covered in oil were found
    • Pollution created by shipping traffic and oil spills have continued to damage the coral in the Great Barrier Reef
  • Deadweight loss occurs, as there is a welfare loss, because we have a loss of social benefits due to overproduction of the good caused by the externality
  • Deprives future generations, as oil and gas are limited resources

b) Measures that could affect Market Failure in Oil and Gas Market in Australia

Government Policies

  • Negative Production Externalities
    • In 1970, protests caused a Royal Commission and the prohibition of oil drilling/mining in the region
      • They are drilling in other parts, so there is still production
    • Government is introducing advertisements for solar panel installation, to create demand for renewable energy and reduce pollution caused by the oil/gas market
      • As of January 2022, more than 3 million solar PV systems have been installed across Australia
    • Australia is switching to renewable energy to reduce the amount of pollution caused

Market Policies

  • Negative Production Externalities
    • Provides limits on the externality as to how much can be produced
      • Reduces pollution
        • Lowers MSC curve
      • Leaves more for future generations
    • Provides policies on mining and drilling
      • Less drilling/mining, thus wildlife is less damaged
    • Some firms are planning to become fully energetically sustainable, and aim to have 0 net carbon emissions, e.g. Coles
  • Providing taxes on the oil/gas market
    • Reduces quantity produced, and the price is raised
    • MPC rises to MSC
    • Taxes eliminate deadweight loss

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