McKibbin: US gas to hit Australia

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What is it, national MB day today? From the AFR, Warwick McKibbin is out with another warning that will be familiar to readers:

Professor McKibbin said the expected massive expansion of shale gas in the US would reduce the price of world gas prices from 2016 onwards.

This would cause manufacturers and other energy-intensive industries to switch to gas-fired power from coal-fired power and hurt Australia’s coal prices and export volumes.

“From Australia’s point of view this shock in the US reduces Australia’s terms of trade by about 8 per cent over the next couple of years,” professor McKibbin said.

He went on to say it will weigh on the dollar and its good to see him doing his part. Sadly, I suspect it’ll weigh on more than just that.

Comments

  1. Thanks I was just trying to track this down after seeing DFM’s tweet on the RHS.

    So … what’s Bloxo’s take on all of this? Do you think he’s looking up “recession” on wikipedia?

  2. What is it, national MB day today?

    Its always like this. You’re wrong for a very long time, then all of sudden you’re right with a vengeance. It was much the same leading up to the tech wreck.

    • reusachtigeMEMBER

      Not really wrong, just before their time. It’s all been warnings of where we were obviously heading, and now we’re there, that is all.

  3. Alex Heyworth

    “From Australia’s point of view this shock in the US reduces Australia’s terms of trade by about 8 per cent over the next couple of years”

    There goes Treasury’s assumption of only a 20% decline in the terms of trade over the next few years. If iron ore and coal don’t add up to more than 12% over the next couple of years I’ll eat my hat.

  4. MontagueCapulet

    This assumes the shale gas revolution in the US actually happens. There are plenty of commentators who say it is a mirage. There’s lots of gas at the moment because there has been lots of drilling, but the decline rates are horrific (e.g. 60% decline in year one) and once the true cost of the well over the lifecycle becomes apparent investment will dry up and production will fall.

    It’s just a story the USA is telling itself at the moment to feel good. Give it 18 months and the bubble will pop.

    • Richard CampbellMEMBER

      I’m with MontagueCapulet. The gas supply is real but return on capital for the small companies looks poor to horrific. The #2 Chesapeake is bleeding through the nose trying to sell off acreage and getting a third of what it expected. Debt is $12 billion. It is trying to restrict drilling cost below $6 billion but it is a tail chasing exercise. Each well costs up to $3m for a short well profit life of less than 3 years. It is one thing to drain an oil well for 20 years even at low rates of production after full capital return, but shale beds either require stimulation or re-drilling from the same pas at a different depth, or a new pad entirely.

    • That is quite an amazing machine. Quite literally epochal defining. I hope that it isn’t too good to be true.

  5. There is nothing like second mover advantage.

    Even if as some pundits state that depletion rates are horrendous it won’t affect the late comers. They will have the choice to commit or not.

    There are CSG & Shale gas deposits globally. It has been both the tech., experience and supply infrastructure that acts as the main inhibitor. relative to other energy resources availability, prices and strategic considerations..

    Regardles of these impediments, the global gas pricing mechanism is moving from regional hubs to global pricing, like oil.

    Don’t forget, that renaging on long term contracts is the norm, relative to market. That or renegotiation or cancellation. No one likes cancellation.