Five reasons why the RAAF should carpet bomb Curtis Island

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It would be in the national interest. Curtis Island only has 1200 odd workers in its three LNG plants. Yet it is doing untold economic damage everywhere else, costing many thousands of jobs. This is because gas is the key input into the entire east coast energy system. As Innes Willox said yesterday:

Gas prices went up because the market was utterly transformed by Liquefied Natural Gas exports. Export demand required production to triple, with nearly all of the new supply coming from Coal Seam Gas with higher production costs than older conventional resources. Producers now expect export parity pricing. And demand ramped up so fast that production seems to have struggled to keep up, bringing scarcity pricing for a while.

Electricity prices went up because higher gas prices raised the operating costs of gas-fired generators, and because the role of those generators in setting wholesale electricity prices…

Economic modelling done on the impact of the LNG plants was conducted by Victoria University in 2014 when MB and others were warning of perverse outcomes. It shows that the economy is better off the lower the LNG price goes:

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Construction of the new LNG facilities stimulates national employment, but when building is complete, the direct stimulus ends. In the long-run, the new LNG production has a negligible impact on employment, but lowers the real wage rate.

The explanation of macro effects begins with the impacts on the national labour market. Figure 2 shows percentage deviations away from base case values in national employment (persons employed) and in the national real wage rate.

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The LNG projects are expected to increase real GDP.
Figure 3 shows percentage deviations away from base case values in real GDP. The solid line shows the overall impacts. Initially, because of the LNG construction real GDP increases by around 0.3 per cent relative to its base case level (i.e., its level without the new LNG projects). This increase dissipates over time, with the long-run impact being an increase of a little less than 0.2 per cent.

The outcomes for real GDP reflect the balance of two offsetting forces. The expansion in LNG exports at the high global price results in a terms-of-trade increase for the economy. This tends to reduce the real cost of capital, leading to increased capital and increased real GDP. We call this the quantity effect. It is shown in Figure 3 by the upper dashed line. By 2020, the quantity effect adds around 0.8 per cent to real GDP. The annual increment persists thereafter.

Offsetting this, though, is the increase in gas prices for domestic use. The increase gas price allows for larger than normal profit for the local gas producers, but it also raises the cost of production for gas-using industries. Many of these industries cannot pass on these increases, and so cut production. Thus for these industries the increase in cost of gas means reduced production, employment and capital utilisation, resulting in a loss of real GDP for the economy generally. In Figure 3, this adverse price effects is shown by the lower dashed line. By 2020, the price effect subtracts around 0.6 per cent from real GDP.

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Low-price (Baseline) compared to full-price (Baseline)
There is some uncertainty about the future international LNG price. The price assumption for the full-price (Baseline) is shown in Figure 1. To gauge the sensitivity of the modelling to changes in that assumption, we have simulated an alternative Baseline in which the price rises from the current average price of $4.50 per Gj to $7.75 per Gj, which is half the increase assumed in the full-price (baseline). Figure 7 shows percentage deviations in real GDP implied in both simulations. In the years to 2018, the absolute difference in results is relatively small, with the full-price (baseline) being less stimulatory than the low price (Baseline). The difference is magnified in the long-run. Roughly, with half the price increase, we get nearly twice the increase in real GDP.

This rule follows for most of the other results. For the long-run, in the low price (Baseline) scenario relative to the full-price (Baseline) scenario the sign of the deviations is the same but the magnitude of the deviations is roughly doubled.

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And the modelling assumed that the local market would price at export net-back when it is still paying much higher for bulk contracts.

There are other good reasons to flatten Curtis Island.

The LNG cancer has corrupted Canberra. Rather than fix the energy issue at its source, the Coalition Government has turned it into an Enron-style campaign against decarbonisation. As gas has been priced out of base load power it has placed greater strains and political emphasis on energy security, used to attack renewables and renovate coal, as well as creating huge new energy red tape. Thus Curtis Island is now also seriously jeopardising Australia’s effort to join the world in fighting climate change.

Then there is the fact that Curtis Island pays no tax on the exports. All of the gas it ships offshore loses money so there is nothing to tax. In this sense, Australians are quite literally paying Curtis Island to carry away their gas like it’s garbage.

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As well, Curtis Island has crashed the Asian gas price so regional manufacturing competitors can put us out business all the faster. This effect is compounded by LNG keeping upwards pressure on the currency and, conversely, upwards pressure on local gas prices when the currency falls, meaning it is destructively pro-cyclical while being profitless.

Second last but certainly not least, market integrity demands that we do it. QLD LNG was a massive bubble that burst, leaving a legacy white elephant assets that are being bailed out by yours and my energy bills. Bombers will return the capital misallocation to it source, restoring functionality to energy markets.

Finally, it’s mostly foreign-owned so the capital won’t be missed.

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Ok, that’s six reasons but what could be more appropriate than being unable to count the number of reasons why Curtis Island should be creatively destroyed?

The more I think about it the more sense it makes to send in the Hercules.

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.