The AFR and The Australian are rotting from the head

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Late last week I received this email from Michael Stutchbury, editor of the AFR:

Dear Valued Subscriber,

Energy crisis explodes at the Financial Review Business Summit. Is populism just starting or potentially on the wane? What should Australia do? 

Malcolm Turnbull sensationally declared a national ‘energy crisis‘ at The Australian Financial Review Business Summit as an east coast electricity grid destabilised by politically-charged climate change policies collides with politically-driven gas shortages.

Australia is becoming the world’s biggest exporter of liquefied natural gas: our once-in-a-century resources boom is turning us into a global energy superpower. And we’re rich in coal, gas, uranium, wind and solar resources. Yet we’re struggling to keep the lights on at home. It’s a massive national policy failure, or a case of politics getting in the way of good politicians, according to EnergyAustralia boss Catherine Tanna at our Summit as she sat next to Energy Minister Josh Frydenberg.

Turnbull, Frydenberg, Tanna, Business Council of Australia president Grant King, who led Origin’s Gladstone LNG project, and South Australian Senator Nick Xenophon all tried to define the problem at our Summit. Xenophon even ruled out helping to pass company tax cuts before the crisis was dealt with.

The problem is that Australia is producing less gas than we should yet exporting more than we have before, Frydenberg said. That’s generating gas shortages – officially identified in an Australian Energy Market Operator report this week – and sending electricity prices higher. How did we get ourselves into this mess, Frydenberg asked.

The mess is collapsing Australia’s traditional competitive advantage of low-cost, fossil fuel-based energy. This is undermining Australia’s great opportunity – highlighted at the Business Summit by former Goldman Sachs economist Jim O’Neill – in the continuing rise of the Chinese and Asian middle class.

But taking this opportunity requires the right policy choices, including resisting the worst of the global rise of political populism. The irony is that the energy crisis raises the prospect of the ultimate populism: politically forcing leading LNG producers to divert contracted export sales to domestic customers in order to try to make up for other policy failures.

The LNG export expansion is in the national interest, helping to power the rise of the Asian middle class to whom we want to sell a lot more other stuff. But state governments – particularly that of NSW and Victoria – have prevented the supply of gas from expanding in response to greenie and farmer political pressure (comparable to the political ban on nuclear power).

That’s now sharply pushing up gas prices for manufacturers, causing job losses and sending some processing plants offshore.

At the same time, state and federal governments have aggressively force-fed unreliable but politically-popular renewable energy, mostly wind, into an east coast electricity grid that requires a reliable baseload that traditionally has been provided by coal.

Political shaming is encouraging the exit of dirty stations such as Victoria’s Hazelwood. As Turnbull argued at our Summit, the models suggest gas will step in as the cleaner transition fuel. As the extra LNG export demand collides with the politically-imposed domestic supply constraints, gas is in short supply and more expensive.

To cap it off, the old-world electricity grid is being technologically disrupted much in the way retailing, taxis, hotels, media and so on have been, as Chanticleer writes. The statewide blackout of South Australia’s renewable heavy power system in September was the canary in the coal mine, so to speak.

Grant King framed the gathering crisis as the result of populist policy decisions taken three to five years ago. The aggressive mandated renewables targets – 20-plus per cent federally – and state bans on gas development were politically rather than analytically driven. The result is a multi-year gap in the development pipeline that will be costly to resolve.

At the Summit, Turnbull revealed he was summoning gas majors ExxonMobil, Shell, Santos and Origin – along with the big three LNG ventures at Gladstone – to an urgent meeting next week to resolve the ‘crisis’.

The LNG majors fear that politics will force them to divert contracted export volumes to domestic customers and will seek to blame state government development bans. Turnbull and Frydenberg recognise the terrible sovereign risk of breaking export contracts. But they will talk tough to pressure the gas producers to bear the cost of sorting it out. Frydenberg complained at our Summit that Victorian gas, presumably from the Bass Strait, is being diverted to the Queensland LNG exporters at the expense of Victorian manufacturers. Shell suggested similar.

As Angela Macdonald-Smith writes, the majors could do all sorts of ‘gas swaps’ to deal with the immediate crisis. And there’s the looming Finkel report into the security of the electricity grid. EnergyAustralia’s Tanna stressed that any electricity system response had to be ‘investable’: that is, politically stable enough for energy companies to invest in.

Policy instability has been the defining curse of Australian climate change and energy policy over the past decade. Along with King’s former company Origin Energy, Tanna’s EnergyAustralia, AGL and BHP Billiton backed an energy intensity scheme for energy generators. Also supported by chief scientist Alan Finkel, it would be a sector-specific carbon price that, in principle, should help transition the energy sector from dirty coal to cleaner gas.

But, clinging onto Tony Abbott’s demolition of Labor’s overly-ambitious carbon price schemes, Turnbull again ruled it out at our Summit. It simply wouldn’t work because supply-side bans meant the gas wasn’t there, he said.

In the published paper it included one last paragraph:

But that would seem to allow previous bad policy results to rule out potentially good policy solutions. Worse still would be if those same bad results led to a banana republic-style tearing up of previously lauded gas export contracts in order to keep the lights on at home.

Let’s take a moment to consider what is a banana republic. Wikipaedia:

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Banana republic or banana state is a political science term used originally for politically unstable countries in Latin America whose economies are largely dependent on exporting a limited-resource product, e.g. bananas. It typically has stratified social classes, including a large, impoverished working class and a ruling plutocracy of business, political, and military elites.[1] This politico-economic oligarchy controls the primary-sector productions to exploit the country’s economy.

So, does Michael Stutchbury’s above critique of the Australian banana republic fit within this definition? Is he right that “tearing up of previously lauded gas export contracts” would be a Third World disaster? Or is something else going on here?

Let’s first compare ourselves to the correct definition to frame the question:

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  • do we have political instability? Yep.
  • are we largely dependent on exporting a limited-resource product? Yep.
  • do we have stratified social classes, including a large, impoverished working class? Not too bad but increasingly so in youth and the unpropertied.
  • are we ruled by a plutocracy of business, political, and military elites? Yes on the first two, so far avoided the last, probably because the first two are so close.
  • does oligarchy control the primary-sector productions to exploit the country’s economy? Yep.

In his critique, Stutch largely relies upon the ideas of Grant King, Catherine Tanna and BHP, yet these three between them are in large part responsible for the energy crisis. The first two were key executives in the building of QCLNG and APLNG, two of the three loss-making LNG plants on Curtis Island that are sending Australian gas to Asia. According to Stutch’s own paper, the LNG plants have all-in break even costs in the USD12-14 range,

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Yet the current Asian LNG price is bouncing around at USD6-7. Tanna’s and King’s old firms are applying discriminatory pricing to the local market to make up for export losses, charging anything they like up to USD14 to bulk customers. Right along with BHP, which part owns the Gippsland JV that dominates south eastern gas supply, and is refusing to sell it anything short of extortionist rates.

So, in making the judgement upon Australia that it will be a “banana republic” for “tearing up” LNG contracts, Stutch is effectively handing Dracula the keys to the blood bank.

Stutch is a card-carrying member of the Murdoch School of business journalism that privileges the views of individual executives and businesses above those of markets or even wider liberalism. It celebrates the CEO as ubermensch, conflates markets with private ownership and eschews all forms of government as anti-progress. Murdoch journalism trades obsequiousness for access and holds glossy “leadership” events to bow and scrape before its much-loved titans of industry.

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You can see why this ideology would serve Rupert Murdoch very well in his pursuit of an ever-expanding rent-seeking empire.

But it has nothing to do with the AFR of the past, which championed markets. For that matter, it has little do with capitalism, which relies upon competition to drive efficiency and to serve the goal of progress. It is, in fact, crony-capitalism, anti-market and anti-liberalsim, as well as pro-oligopolist. In the Australian context, where resources rule the roost, it is also a key component in our banana republic political economy. You can see the irony here for Stutch, I’m sure.

Now let’s cross to that the Editor-at-large of The Australian, Paul Kelly, another graduate of the Murdoch School:

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Australians now live with one of the great public-corporate policy failures in decades as the nation once touted as an energy superpower is brought to its knees with spiralling power prices, shortages and system unreliability — as the long and unresolved issue of climate change is overtaken by an energy emergency.

…Malcolm Turnbull’s switch after last year’s South Australia blackouts to a new agenda based on energy security and reliability is vindicated but of little compensation. The nation has spent six months learning about the difficulties of feeding renewables into the power system only to now discover gas production cannot meet demand, the latter danger having been warned about for years.

Cast the net wide for blame. There are no innocent parties. Begin with the obsessive climate change and ideological posturing by politicians, the failures by public servants, regulators and advisers to foresee unintended consequences, the utter inadequacy of the federal-state system and the ongoing shambles of conflicting energy policies across competing jurisdictions.

The costs will be borne by households, businesses and jobs. Forget any notion that this crisis will lead to bipartisanship. That won’t happen — energy policy is highly charged with ideology, cost-of-living and jobs competition. The emerging blame game will be fierce. The more the crisis deepens the more it will dominate both state and national politics. The Coalition, Labor and the Greens are locked in a deepening political struggle where an energy crisis has smashed into the already weakening public “hip-pocket” will on climate change action.

The Prime Minister, backed by Energy Minister Josh Frydenberg, aspires to a dual task: to limit the factors that threaten jobs and industry, and to mobilise energy as a frontline political issue to discredit Labor. Turnbull is fierce on Labor’s ideological flaws — it rejects coal, bans gas exploration and developments, and has bet the economy on renewables without proper baseload back-up power. His message is that the threat is serious and follows “years of ideological complacency by the Labor Party.” Bill Shorten has joined this battle, saying the energy crisis responsibility resides “solely” with Turnbull, who is delivering higher prices, more pollution and less reliability.

This week Turnbull, facing a crisis in gas production, announced an urgent meeting of gas producers. This comes in the teeth of dire warnings from the regulator about gas shortfalls and ­electricity supply shortfalls threatening NSW, Victoria and South Australia from the summer of 2018-19 onwards.

Turnbull’s task at next week’s meeting is to secure emergency pledges from companies to increase supply in the near term. “They’ve been put on notice,” Turnbull said of the gas companies. “I’ll be demanding from them their explanation as to how they’re going to deliver security for their customers.”

…Gas was supposed to be the essential baseload substitute for declining coal. But an epic ideological blunder for which Australia pays a high price was the decision by the green and environmental lobbies to cut gas out of the plan in favour of their fixation on renewables. This anti-gas campaign was lethal, had multiple dimensions, exploited the arrogant stupidity of the industry and tapped into farmer discontent.

The reality has come home — relying on renewables, as South Australia does, means that the system needs baseload back-up from gas. The political class, completely unaware of the technical and engineering aspect, has been taught a stark lesson. The message is: if you want renewables, then you want gas. The two fit together.

The gas problem springs from three factors — the ludicrous, destructive moratoriums on gas exploration and development in the states, notably NSW and Victoria; the higher costs for gas development; and the consequences of our massive liquefied natural gas exports, with Australia now exporting two-thirds of the gas it produces, leading to higher parity pricing.

…BHP Billiton chief Andrew Mackenzie says: “We have lost $US100 million in this period because of the intermittency of power in South Australia and also we are facing more expensive electricity.” BlueScope’s chief Paul O’Malley says Australia’s mistake had been to focus “on renewables first and everything else second”, adding that “if we continue to talk that way, there will be more blackouts and there will be more jobs leaving Australia”.

While Labor remains pledged to the 50 per cent renewable concept, this debate has got a long way to run. Labor remains in denial about the significance of the South Australian blackouts. As Frydenberg has said, this shows “the vulnerability of a jurisdiction that relies too heavily on intermittent sources of generation such as wind and solar without the necessary storage and back-up”.

The pro-renewables cult has much traction in Australia — as revealed by polls — but the price, reliability and security costs have now come into play. Frydenberg has helped to establish in the public mind that there is a price to pay, and that the power system should not become the zone for “experiments”, as happened in South Australia. For Labor, however, this issue transcends policy because it has a non-negotiable need to protect its left flank from the Greens. For electoral reasons, Labor cannot surrender the “renewables position” to the Greens.

Dearly, deary me, Paul. Nowhere in your discussion do you mention that:

  • the LNG exporters are losing money hand over fist on every tonne of gas thrown at Asia;
  • that many of the customers don’t even want the gas;
  • the discriminatory pricing they’re applying at home is the very definition of market failure;
  • that fraccing bans in the states (which I oppose) have huge public support owing to fears around aquifers;
  • that even if unconventional gas is released in the south it will flow straight north into Asia as well;
  • that the Coalition has been in power since 2013 and has done absolutely nothing while the crisis built;
  • that had the carbon price not been trashed by Tony Abbott, whom you fully supported, we would not be here at all given energy storage would have been viable long ago;
  • that the “pro-renewables cult” has succeeded only in delivering 8% of Australia’s 44048MW installed capacity as wind and solar. The real cult is for anything dug out of the ground.
  • that the fix is bloody simple: bad third party gas exports for the LNG three who never told anyone that they would need more gas than their own reserves.
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It is staggering to watch former champions of Australian liberalism like Kelly and Stutchbury collapse instead into reflexive support for oligarchy. That is the heart of the problem for the east coast gas market, not to mention the entire over-concentrated Australian economy and much of the developed world. It inhibits accountability, it inhibits evidence-based policy, it inhibits competition, productivity, innovation and efficiency, and it is the key driver of the rise of anger in the pissed-upon community, as well as the populist backlash that both Stutch and Kelly purport to hate.

It’s not as if any of this is a mystery. All of the great political economists observed the tendency for free markets to slip into oligarchy if left to their own devices, from Smith to Schumpeter and Marx.

It is everything that these failed editors should not be.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.