The rise in market prices of gas has adversely affected the operations of the company Viva Energy. Viva energy operating the Geelong oil refinery might be compelled to burn down the liquefied petroleum gas that it essentially produces for their own use due to the gas price hike. The company has acquired refinery as well as hundreds of service stations during the year 2014 from Shell is essentially a consumer of gas as well as electricity and this doubling of gas bills has affected has exerted impact on the cost of operations and in turn efficiency of the operations (Financial Review 2017). As a part of refining function of the company, Viva Energy produces LPG. The management in order to manage the operating cost of the firm that has increased due to increase in gas prices decided to burn down the LPG in place of selling the same as buying this natural gas for production can be an expensive alternative. This hike in gas prices is expected to increase the cost of the energy of the company from around $50 million per year to approximately $100 million in the next 12 years and this can be major setback for the business (Aph.gov.au 2017). In this context, it can be hereby mentioned that this increase in prices of gas is anticipated to increase the operating cost by approximately 20%. The firm supported the government interventions and also realised the need for reassessment of policies. However, in the context of gas reserve, management of Vive considered this reserve of gas as the last resort as this can be regarded as consequence of the market failure (Financial Review 2017).
Essentially, this controversy over the increase in prices of gas as well as electricity has compelled both the federal as well as the state government to interfere into this matter and has asserted to restrict the amount of gas export of Australia in order to lessen the overall internal prices (Financial Review 2017). The government intervention in this regard can help the sector in overcoming the looming threat of the increase in gas prices in the domestic market. Therefore, this current intervention by the government need to be encouraged by the management of the firm as this intervention has somewhat attempted to improve the total amount of gas that is made available for the domestic market (Aph.gov.au 2017). As such, this is anticipated to increase have certain moderating effect but can still lead to increase in the cost of operations (OilPrice.com 2017). Therefore, a reassessment of the policy of the government regarding energy can be considered to be the need of the hour as there are severe impacts of this gas price hike on overall manufacturing in the nation. Particularly, the intergovernmental agreements as well as effective steps by both state as well as territory government can be considered to be the most effectual policy levers that can curb the upcoming increase in the prices (Rios et al. 2013). However, the federal government can be able to exert influence on only a small part of price effects (De Grauwe 2014). In essence, the accountability for regulation of both the gas as well as the electricity supplying industry need to be shared between the territory state and Australian government. The government can exert only a partial influence on outcomes of price and play a role in the process of co-ordinating as well as incentivising different actions (Lütkepohl and Netšunajev 2014).
The management of the corporation might take into consideration the major factors that essentially contribute towards energy process. These factors are the cost of wholesale covering electricity that is being produced or else gas being extracted, network charges for making payments for reliable delivery of energy through the power lines or else pipelines of gas and retail margin for the payments of meter reading as well as other services (Financial Review 2017). The study of the factors can help in understanding the root cause behind this surge in oil prices and develop a future outlook. Study of the components can also help in understanding the fact that the energy bills also contain different components for both the Australian, state as well as territory government programs on environment that are aimed at increasing the generation of renewable electricity. However, the share of different components can essentially vary considerably across different jurisdictions and for diverse categories of consumers. Nevertheless, the transporting cost in addition to wholesale cost fundamentally accounts for approximately three quarter of the ultimate bill of energy. in addition to this, the management of the company Viva Energy might consider analysing the retail prices that essentially incorporate maintenance cost along with the cost of upgrading different networks of supply that are to a large extent established by a only a single commonwealth controller that is under the agreed regulations on a national scale. However, the wholesale cost of both gas along with electricity price is established in the competitive market environment. Whilst some of the major wholesale markets of electricity and gas are related across some state as well as territory boundaries. In essence, state as well as local influences can be a significant element of wholesale price. In addition to this, the management might also consider and analyse the rise in prices owing to investment in network component. Currently, the need for investment in the network component on account of previous underinvestment in preserving the network or to intensify capacity can be taken into consideration. This factor might give rise to rise in prices in the short term but can favourably contribute towards the business in the upcoming period (Cashin et al. 2014).
The management can support adjustment to the environmental policies that exerts huge influence on the overall cost of wholesale energy and further regulation of the retail prices. In addition to this, the administration of the firm might consider establishment of specific reliability standards grounded on values that customers have on reliability of network.
In conclusion, it can be hereby mentioned that management of the firm hat is backing the intervention can affect the retail price outcomes to only a certain extent as is largely restrained by the influence of the price of carbon, renewable energy as well as other energy efficiency dimensions. However, alterations to prices of energy from the amendments in these measures that essentially calls for the need of legislative actions can flow through and aid the end user to certain extent. Again, in order to avoid shortage of supply in the operations, the management might also consider the viability of importing gas into the nations as there is tight national marker even when the global process are somewhat low. The company is paying not only the international price but also the highest level of international price that in turn has led to loss in competitiveness. Thus, the management of the firm might consider effectual regulation in order to meet up the community concerns as regards the issue at hand. Furthermore the management might also support the policy of lifting restriction on exploration of gas by the governing units and get removed the blanket ban on different energy projects or else explorations. This in turn can raise the overall supply and moderate the prices in the domestic market. In this connection, this can be further asserted that a risk based approach, baking the policy of reconsideration of different moratorium as well as bans on different conventional along with unconventional exploration of gas in diverse states can help in expansion of supply and restrict the upsurge in gas prices.
References
Aph.gov.au. 2017. Energy prices—the story behind rising costs – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices [Accessed 14 May 2017].
Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.
De Grauwe, P., 2014. Yes, it’s the economy, stupid, but is it demand or supply?. CEPS Commentary, 24.
Financial Review. 2017. Geelong’s oil refinery may burn rather than sell one of its products to avoid high gas prices. [online] Available at: https://www.afr.com/business/mining/viva-energy-might-burn-rather-than-sell-lng-in-response-to-energy-crisis-20170509-gw0xpd [Accessed 14 May 2017].
Lütkepohl, H. and Netšunajev, A., 2014. Disentangling demand and supply shocks in the crude oil market: How to check sign restrictions in structural VARs. Journal of Applied Econometrics, 29(3), pp.479-496.
OilPrice.com. 2017. Can We Expect A Natural Gas Price Spike In Australia? | OilPrice.com. [online] Available at: https://oilprice.com/Energy/Energy-General/Can-We-Expect-A-Natural-Gas-Price-Spike-In-Australia.html [Accessed 14 May 2017].
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
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