I have described at length how the Morrison government’s pivot away from China was largely the luck of having a motormouth airhead for PM. The stunning pace of the China decoupling is very welcome. There are still vast interests in Australia that would sell Australian freedom to the CCP if they could. Including most of the Australian Labor Party.
This speedy divorce has come at a cost. Because we’ve largely decoupled through diplomatic gaffes triggering CCP blowback, we’ve never developed our own economic plan for the divorce. We’re simply adapting on the run, in train with Morrison’s shotgun mouth.
That has left us exposed in all sorts of ways as various export sectors have had to cop sovereign risk and pivot dramatically. Thankfully commodities are largely fungible and so they can and have adapted well, swiftly finding new markets and diversifying export business.
The economic exposures to China are still huge and the sovereign risk will keep coming. The blunt truth of it is that anybody now engaged with Chinese supply chains, both import and export, needs to find alternatives as soon as they can. Things are not going to improve.
But we still need a post-China plan. The Morrison government should be doing a full audit of all exposures and putting in place transition mechanisms and policy supports to encourage the exit and ease the pain.
One area that needs urgent attention is the east coast gas market. Let me explain why.
Ever since 2014 when the three Gladstone Island LNG export plants opened, Australia’s east coast economy has been short of gas. The gas export cartel has shipped Australia’s cheapest gas into the highly contested Asian market while selling the expensive stuff locally. This is pure monopoly power in action.
This process turned Australia’s unique industrial advantage of $2-3Gj gas into an economic millstone of $20Gj gas. Following on, retail electricity prices doubled for the entire east coast because gas power sets the marginal cost of electricity.
Eventually, this became so stupid that even Australia’s corrupt political economy broke down and something was done. The Turnbull government created the Australian Domestic Gas Security Mechanism (ADGSM) which threatened to curtail exports if the local price did not come down.
The threat worked and the price roughly halved over the next few years. Then it kept falling as an Asian gas glut developed. Power prices tumbled as well thanks to a surge in renewable investment, to an extent owing to the gas-triggered price spikes.
All seemed OK for a while. But the gas cartel had not been broken, it was just biding its time. The ADGSM had never been triggered, it was still just a threat.
Then along came COVID and all hell broke loose in global gas markets. First, there was a crash. Then the stimulus and reopening. Soaring demand hit mothballed operations. Gas inventories depleted worldwide as China sucked in ever-higher quantities of LNG, to become the world’s largest importer.
And now we have this:
Gas prices in Victoria have taken another huge leap to levels of about 10 times average levels, fuelling urgent calls for the federal government to pull the trigger on its domestic gas security mechanism.
Wholesale prices surged to an unheard-of $58.44 a gigajoule in Victoria for a four-hour period on Friday, shocking manufacturers and raising the likelihood of plant shutdowns among those exposed to spot prices.
The spike in prices extended big increases earlier this week driven by a combination of cold weather, reduced production at the eastern states’ largest domestic supply plant and rapidly diminishing stores of reserve gas.
Read that again. The traditional VIC gas price is $2-3Gj. This week it hit $58.44. Sure, there are some local reasons but that is missing the woods for the trees.
The forest standing in front of us is this: the east coast gas cartel exploits every single moment that it can to gouge local consumers. The ADGSM has not broken its monopoly power, indeed it has only succeeded in hiding it. The ACCC consistently confirms this.
So, why is China involved in this when it only owns a fraction of the gas cartel suppliers? The answer is that China owns the vast majority of contracted volumes for the exported gas.
Of the 25mt per annum of cheap LNG exports going to Asia from the east coast gas cartel, 16mt of it is going to China. Two-thirds of it. Last week, China was paying $12Gj for this gas while VIC paid $58Gj.
In sovereign terms, to describe this as untenable would be to call the Pacific Ocean a puddle. Cheap Aussie gas is building weapons in China that threaten us every single day. Meanwhile, the staggeringly expensive leftover local gas is razing Australian industrial capacity and our ability to fight back.
No country can survive this kind of suicidal assault for very long. The ADGSM must be triggered and the local gas price smashed below export net-back. Preferably to a fixed price at $5Gj. If that means breaking Chinese supply contracts and the price rises for it then all the better.
Any other outcome is the kind of treason that should end at the gallows.
