Australia’s gas policy failure

ScreenHunter_18 Feb. 11 10.19

Following Andrew Liveras, managing director of Dow Chemicals Craig Arnold has written a stinging critique of Australian gas policy, which he claims has caused a shortage and driven-up gas prices for households and industry. From The Australian:

AUSTRALIA’S wealth of natural gas is reserved for export. The result is steeply rising prices for household gas and power and a choking effect on an otherwise healthy domestic industry and jobs…

According to the Queensland Competition Authority, electricity costs will rise in the next year by around 29 per cent…

NSW’s largest gas retailer, AGL, announced this month that it would hike household prices by 20.3 per cent in July. Again, the problem is a shortage of supply. Yet we know there is ample gas…

Effective public policy would have created a competitive local market for Australia’s abundant gas…

Among a number of red herrings, producers have sought to portray delay in coal-seam gas development as the sole factor in shortages. This is not right… Very large gas resources are held back — hoarded — for export sometime in the future… [Now]…consumers face cost hikes for gas and power, and industries reliant on gas face steep price hikes — at least double in most cases. Less obvious is the opportunity cost…

The current policy settings have produced a situation in which Australia’s advantage in gas resources is allocated solely to the interests of those whose profit is maximised by maintaining the “cosy club”.

There is a lot of truth in Arnold’s claims. In its haste to rubber stamp new LNG export projects and earn some revenue via the Petroleum Resource Rents tax, the Federal Government has effectively allowed a domestic gas shortage to develop, which now threatens the livelihood of domestic industry, as well as forcing up costs for households.

By failing to develop a gas reservation policy, oil and gas majors have been permitted to charge the domestic consumer a world oil price equivalent, which is helping to kill manufacturing via higher costs – the most recent example of which is Alcoa’s decision to cease operations at Point Henry – and makes a mockery of the Prime Minister’s goal of making Australia “the affordable energy capital of the world”.

Ironically, energy companies and the politicians that serve them are now exploiting the problems they’ve created, by using the resulting gas shortage to insist that Australia needs widespread development of Coal Seem Gas in order to ensure domestic supply. Yet, these alternative sources of gas pose real environmental dangers, including potential poisoning of ground water, which could adversely impact on the agricultural industry and are unlikely to be cheap enough to make a difference anyway.

It’s yet another example of failure in government policy making, with the mad dash for LNG projects that took hold of successive governments and the gas industry now creating deleterious longer-term consequences. Abundant gas should have been a competitive advantage for Australian industry, but like other areas of government policy (e.g. the urban land market), this advantage has been squandered.

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Comments

  1. who cares, it’s more important to repeal carbon tax, “secure borders”, abolish abortus, ban gay marriage … and other poppulist things to hide his intention to privatise and monopolise everything and introduce private health care US style

  2. And AGL has applied for a whopping 25% increase in gas prices to the NSW regulator.

    As I understand it, Australia is the only country globally that does not have a reservation policy for citizens and industry.

  3. West Australia has a gas reservation policy . 15% if my memory serves.

    As with most mining in Australia 85% of industry is foreign owned as are the profits .

    We have just come thru the biggest mining boom in our history. Just what have the Australian people gained from it?

    A distorted economy, manufacturing destroyed,gas prices thru the roof, political/business corruption on a grand scale , Massive environmental destruction .

    And what we did get we pissed away in tax cuts & middle class welfare, to buy some shonk politicians votes. Clever country my arse.

    • Couldn’t agree more! And what topics do we get served up by MSM/Politicians(corrupticians more like) for discussion every night? Gay marriage, paid parental leave, never been a better a time to get into property.

      Its such sickening BS. Thank God for the internet is all I can say or the next plane couldn’t get me out of here quick enough.

  4. A gas reservation policy effectively taxes gas producers to subsidise gas users.
    Why would you want to do either of these things?
    If you want to subsidise manufacturers, why just those that use gas?
    If you want to tax gas producers more, then the most efficient way to do so is through the PRRT.
    If you then wanted to benefit businesses generally you could use the revenue to reduce the companany tax rate.

  5. Firstly, Australian low-value manufacturing is already in decline and stopping energy costs from rising will NOT materially affect this secular trend.

    Secondly, people fail to see the big picture by viewing this as Australian industry vs. the rest of the world. The accurate perspective is supplying energy to efficient manufacturers in Asia so the whole world (including Australia) benefits from cheaper goods.

    It’s sad that those advocating a gas reservation policy will also hold views opposing tariffs and subsidies in most other industries. Hypocrisy or cognitive dissonance? Both?.. you decide.

      • Have you seen the smog in Korea, Japan, Taiwan or Singapore? No, because they are efficient and can afford the cost of environmental regulation.

      • Well I have to agree with there, and more efficient they become the more business we lose to them so we can practice our efficient? Resource extraction ?

      • Worked spectacularly well the last 10 years wouldn’t you say? Natural resources are a blessing not a curse. The fact that we have a small population and so many natural resources is a huge benefit. Similar to Norway and their oil resources.

        The world will always need minerals, energy and agriculture.

    • Lower energy costs would make manufacturing viable here. Lower them enough and with a bit of encouragement manufacturing could flourish and thrive. What are we – a quarry and nothing else? And don’t give me any comparative advantage guff, governments have always picked winners and nearly all successful global companies were protected until they were ready to compete globally.
      Why are we potentially destroying farmland for generations to come for the benefit of a few multinationals? And what’s your plan for our children when the minerals run out or are no longer desired? And all for the sake of cheap plastic crap that lasts a week before spending centuries as landfill.

      • What does it matter if we derive much of our national income from resources? Every country with enormous oil & gas resources become hugely wealthy by allowing that sector to flourish.

        If Australia can export minerals and energy while importing all manufactured goods then Australia doesn’t need a large manufacturing industry.

        I dispute farmland is being destroyed. Australia has the strictest environmental regulation in the world. The minerals running out argument is false given we have 120-200 years of iron ore supply. “Cheap plastic crap” is what lifts living standards or would you rather expensive metallic crap instead?

      • Australia should be hugely wealthy by now but in case you haven’t noticed we pissed it away. Norway should have been our role model for what to do with a resource boom. They have set themselves up for generations to come and they didn’t do it by allowing multinationals rape their country while collecting a piddling resource rent tax. They didn’t do it by blindly swallowing globalist laissez faire ideas while throwing their citizens under the bus.

        I can say QLD has proceeded with fracking at break neck speed and without environmental due diligence. Western downs is pockmarked beyond recognition and this gas is directly piped to Gladstone to be shipped overseas by multinationals – net benefit to QLDers – a piddling rent resource tax and a handful of jobs that mostly went to 457s.

        How does cheap plastic crap lift living standards? Do you mean living standards in China? Improving living standards in other countries is not Australia’s duty or concern. BTW products made to last produce less pollution and less waste.

    • What a curious time frame you have there, 10 years. So we’re in for a Zimbawe/Brasil/South Africa/Angola/Chad/Argentina/Russia style future.
      What great company your selling us out to…

      • Most of those countries have rampant corruption and are politically unstable. These and other factors have ruined their economic prospects. It’s highly improbable that Australia will face a similar fate.

  6. The domestic shortage is caused by price differential between export and domestic demand being allowed to increase and be sustained over a longish period.

    Domestic prices will over time be at export/import parity in an open economy, maybe less some transport and capital costs.

  7. NSW’s largest gas retailer, AGL, announced this month that it would hike household prices by 20.3 per cent in July.

    WTF!! That’s huge. If memory serves it went up last July 9.2%

    It is silly not to have a reserve, a buffer, but the same thing happened with us with oil in the 70s, we started selling it at world price and not saving it for ourselves. Funny thing is the opening up of gas pipelines is one of the things that got us out of that mess.

    The supply charge alone will kill us and that’s before you use any. I think its currently 55c/day. I’m not sure what it is per MJ but I’ll certainly be checking when I get home.

    IPART or whoever the NSW regulator is should deny this rise. It will kill those on low/fixed incomes.

    • Diogenes the CynicMEMBER

      Switch to heat pump, replace gas cooktop with induction (even buy an induction hotplate). Disconnect gas and laugh at their silly supply charge.

      PV works well for heat pump. Induction cookplates are the equivalent of gas in terms of cooking experience and way easier to clean.

  8. By failing to develop a gas reservation policy, oil and gas majors have been permitted to charge the domestic consumer a world oil price equivalent, which is helping to kill manufacturing via higher costs – the most recent example of which is Alcoa’s decision to cease operations at Point Henry – and makes a mockery of the Prime Minister’s goal of making Australia “the affordable energy capital of the world”.

    Why should we consumers or our industry not pay the same price as other users for the same commodity? I can see that paying less gives our energy-intensive industries a comparative advantage, but is that really where our future lies? If so, what happens when they lose that advantage?

    I’m afraid I fail to see what economic argument can be mounted in favor of your proposed policy. You need to think this through to the end, not just stop at saying it would give our energy-intensive industries a leg up. If keeping energy prices down benefits our industries, why don’t we have laws to keep our labor costs down? Or reserve iron ore production for domestic use?

    • “Why should we consumers or our industry not pay the same price as other users for the same commodity? ”

      Wake up. Why shouldn’t the people of this country benefit from their own resources? Your question is borderless world insanity. Go to China and claim their Rare Earth Minerals for all the people on Earth and see how far you get.

      You mean competitive advantage, and again – why shouldn’t the people of this country use everything at their disposal for competitive advantage? You would have us compete with third world sweat shops on wages alone, Gina? We can only do this by becoming a third world hole ourselves. Is that what you want for this country and your fellow countrymen and women?

      • Emotional slagging off of someone with a different view is not an argument. When you have something concrete to add, say it. If you think paying less for energy is a good idea for our country, tell us why.

        Letting our big energy users get cheap energy at the expense of the wider community is no better than subsidizing inefficient car plants. Makes some sense if there is a prospect of them becoming more efficient so they can compete without subsidies, no sense whatsoever otherwise.

        I am not convinced by anything Andrew Liveris or his offsider (or Leith) have said that there is any reason to believe our large energy users will be encouraged to become more efficient by subsidizing their energy costs. Nor will the wider community become more efficient energy users by subsidizing their energy costs.

      • Calling someones with a different views argument “Emotional slagging off” is no excuse for ignoring their argument and not answer their questions.

        You ask:

        “Why should we consumers or our industry not pay the same price as other users for the same commodity? ”

        while totally ignoring the fact that the commodity belongs to Australia not “other users”, which I consider “borderless world” insanity and said so.

        I did tell you why I think paying less for energy is a good idea for our country – competitive advantage.

        BTW: You have changed your argument from:

        “Why should we consumers or our industry not pay the same price as other users for the same commodity? ”

        to

        “Letting our big energy users get cheap energy at the expense of the wider community”

        Let me know when you have stopped moving the goal posts.

      • PS, the way to become wealthier is to produce more. Real wealth is not money. To produce more, you need to be more productive. To be more productive, you need to reduce inefficiency. Subsidizing inefficiency, by however circuitous a means, is not the way to reduce it.

      • You mean produce as in manufacture? A bit hard when manufacturing is dead in the water in this country – uncompetitive. And like I said to compete with third world sweat shops on wages alone we would need to become a third world hole ourselves.

        Production for productions sake can be very wasteful and inefficient.

      • No I don’t mean just stuff that is manufactured. Production is whatever other people are willing to pay for. It could be manufactured goods, it could equally be intellectual property or works of art. It could be services that people value.

        If a nation can produce more of what other people value (or more of what it values itself) its own people can consume more of what they value. That is true wealth. For example, if Hollywood makes more blockbusters that make millions worldwide, that makes America richer and means Americans can consume more.

    • I haven’t replied to your argument because you haven’t produced one yet. You have asked a question – “why shouldn’t the people of this country use everything at their disposal for competitive advantage?” I originally considered this a rhetorical flourish, like your second and third questions, but on reflection it is worth answering.

      The answer is quite simple really. A true comparative advantage arises when a nation is more efficient than other nations at doing something. If that something is digging up iron ore, then one of the best things that nation can do is dig up iron ore.

      If there is no activity at which a nation is the best, they should still strive to do the things they are better at than most nations. All nations will have quite a few of these things, and they should focus their efforts on those.

      Subsidizing things does not mean that your are more efficient than other nations at doing them. It just means that the nation is unwilling to recognize that it doesn’t really have a comparative advantage in that area and would be better off doing something else.

      There is only one real reason for doing something like reserving gas production for domestic use, and it has nothing to do with comparative advantage. The reason is to avoid upsetting voters who don’t understand that gas subsidies by another name are not in the national interest, or multinational company executives who do understand that but pretend not to.

      • I said competitive advantage not comparative advantage.

        Economic history tells a very different story to the Theory of Comparative Advantage.. History shows that no large, successful democracy has industrialised and attained a high standard of living using the Theory of Comparative Advantage. The UK, the US and Japan all had to “cheat” on the comparative advantage theory to achieve market dominance and only began to preach free trade economics after they had attained dominance and even then they continue to heavily subsidise industry and pay large subsidies to farmers and exporters.

      • True, you did. But I hope you are not suggesting that the French, for example, benefit economically from hugely subsidizing hopelessly inefficient farmers. There are social benefits, to be sure – the French like their countryside the way it is, French farmers are a large and powerful lobby group – but it certainly isn’t an economic advantage.

        I’m afraid I consider ridiculous your implication that we could somehow achieve market dominance in energy-intensive industry. Maybe in iron ore? Gets back to sticking to what you are best at.

      • I wasn’t implying that “we could somehow achieve market dominance in energy-intensive industry” at all. I was pointing out that market dominance has historically been achieved by governments “picking winners” and creating the conditions for them to succeed. The Theory of Comparative advantage – which you obviously subscribe to – is resorted to after market dominance has been achieved in order to gain access to foreign markets.

        Our governments, like yourself, are totally enamored of this Theory of Comparative advantage. They have unilaterally slashed tariffs way below world average; tendered to industry on a purely commercial basis with no preferential contract to Australian firms and used National Competition Policy to abolish domestic market support schemes for agriculture and manufacturing.

        The decline in manufacturing industry has been precipitous and now risks the loss of a critical mass in many industries. Successive governments have slashed protection and weakened anti-dumping laws. They have taken the view that Australia does not need an industry policy because in an efficient market with rational participants the market will always decide what Australia can and should produce.The decimation of the manufacturing sector and increasing reliance on imports is the primary cause of Australia’s burgeoning net foreign debt. This deficit was almost entirely due to imports of Elaborately Transformed Manufactures much of which Australia is capable of manufacturing domestically. Increasingly, domestic production of goods and services is insufficient, so we have resorted to borrowing overseas to buy the imports we need to maintain our living standards.

        http://kkozak.wz.cz/Porter.pdf

      • Maybe our government is “picking winners”. Just not in the fields you would like them to be doing it.