Various proposals for price regulation in the Israeli energy market are still the subject of public debate. It is fitting to thoroughly examine all aspects of this complex issue before reaching any hasty decisions. Most instances of gas price supervision, as it was practiced in Egypt and Russia, have led to gas shortages and to high prices over the long term. On the other hand, the lifting of such supervision has often triggered the opposite result and led to lower prices. Argentina’s decision in 1994 to lift its supervision led to additional investments and to gas prices that were lower than the global level. Political pressure and proper competition policy enabled the Argentine gas monopoly YPF to preserve its competitive low prices.
There is a direct connection between gas price supervision and the issue of gas exports. Supervision is more effective in a closed market that controls exports, as was once the case in the Netherlands. Since the question of gas exportation has already been settled and exports are a crucial component in the development of the Israeli gas market and in the achievement of geostrategic objectives, over-supervision of gas prices under these conditions is likely to be ineffectual.
Moreover, low natural gas prices have a negative effect on the level of current investment, as well as on the extent of future searches for new gas reserves and the construction of the necessary infrastructure. The future price of gas is one of the main factors taken into account by energy companies when making decisions on new investment, particularly when that price does not accurately reflect the resource’s actual price.
Many American companies are already reexamining long-term investments in an era of low gas and oil prices. The International Energy Agency’s most recent report dealing with energy market forecasts for 2014 also pointed out this risk, and expressed concern that a sharp blow to their cash flow will harm the companies’ ability to continue supplying cheap energy to the global market over the long term.
In addition to the fact that price regulation can badly affect investments by existing companies, it also deters the entry of new foreign investors. Such investors are vital for financing, exploring and developing Israel’s gas reserves. These activities require massive investment, which the current investors in the market are unable to provide alone. The effect of gas prices on the entry of new investors can also influence the construction of gas infrastructure for factories and the adaptation of gas for industrial use. It is essential for this kind of construction to be worthwhile in order to bring down the cost of energy for industry, an important factor for policy-makers who are trying to cut the cost of living in Israel.
The process of price supervision is no less significant than the price itself. A survey of similar processes around the world shows that price supervision works in a centralized situation. In Israel, where the process is diffused and inefficient, the natural gas industry is under the purview of many regulatory bodies, including the Ministry of National Infrastructures, the Ministry of Environmental Protection, the Electricity Authority, the Ministry of Finance (all departments), the Ministry of Justice, the Ministry of Defense, the Israel Antitrust Authority, the Ministry of the Interior, and others. This situation creates real concern that the involvement of too many bodies in the energy pricing process will negatively affect its transparency and effectiveness.
Policy-makers who favor artificially low gas prices often refer to the low gas prices prevalent in the United States. It should be recalled, however, that America’s low prices (hovering at about $4 per natural gas unit MMBtu) are the direct result of the policy of widespread granting of licenses, a stable regulatory climate and a high production level. These factors gave rise to a prosperous gas market in the US, with low prices for both household and industrial consumers. By contrast, these conditions do not exist in the current Israeli market, and creating them is the key to lower prices and the support of market forces.
The bottom line: Streamlining the exploration process (searches and test drillings) and ensuring a more stable and transparent regulatory environment for the development and production of natural gas can generate gas prices that are lower than those set by regulation, which do not accurately reflect the actual price to consumers.
Professor Efraim Chalamish teaches Business Administration and Law in New York and is an advisor in the fields of international trade, foreign investment, and energy.
Published by Globes [online], Israel business news - www.globes-online.com - on January 27, 2015
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