Western Australia's Domestic Gas Reservation Policy: Modelling the Economic Impact with a Computable General Equilibrium Approach*

Abstract

The gas reservation policy of Western Australia (WA) diverts 15 per cent of liquefied natural gas exports to the local market, suppressing domestic gas prices. To examine the policy's effects, this paper employs a detailed model of the WA gas market that incorporates project-by-project supply, the very large fixed costs typical of gas supply projects, foreign ownership on both sides of the market and oligopolistic pricing power. This model is interlinked with the established Centre of Policy Studies’ Victoria University Regional Model of the Australian state and national economies and shows that the policy, as it has been applied to the Gorgon and Wheatstone projects, imposes an overall net loss to the nation of around $600 million each year. The net loss to Australian households is estimated to be $300 million. Moreover, no net long-run advantage is seen to be conferred on WA's workers or consuming households.