Energy war-profiteers launch JobSmasher unstimulus

You’d think that they’d learn. As I helped pull together the second version of the Garnaut Climate Change Report in 2011, the Gillard Government was watching its polls slump relentlessly.

Many didn’t understand why. Sure, the deposing of Kevin Rudd had upset many. But there was something else going on that was really pissing off the public despite an apparently strong economy.

It was falling house prices.

It wasn’t Labor’s fault. It was the tail end of the China resources investment boom. But nobody cared about that. The RBA was hiking and the east coast economy (where all the people are) was in recession.

The Coalition blamed the “carbon tax” for it all and was elected two years year.

And here we are a decade on, Labor remembers none of it (except that Rudd was deposed by miners) and is committing all of the same mistakes.

The problem is, once again, a tangle of energy issues, the RBA, and house prices but this time it looks much more combustible.

With its feet barely under the desk, Labor pollies seem unable to grasp the economic disaster that is unfolding before our very eyes.

Check out the size of the energy shock. These are total Australian costs for coal and gas:

Coal

  • Pre-Ukraine war coal at $100 = $13.7bn
  • Post-Ukraine war coal at $400 = $45.6bn

Gas

  • Pre-Ukraine war at $8Gj = $5bn
  • Post-Ukraine war at $40Gj = $25bn

For gas especially, the price rises take time to filter through the contract system which has a duration anywhere from 1-10 years. In recent years, these have tilted more short-term so let’s guess an average of four years, meaning an extra $5bn every year multiplied by four.

But, electricity prices have already flown because they price off spot. So, from a turnover of $11.5bn in 2020 with an average price of roughly $60MWh, this year we’ll see $300MWh and a projected $57.5bn.

In short, at today’s prices annualised, the energy shock is $51bn for the next year in utility bills. And keep adding the better part of $5bn a year every year for four years.

None of this is going to happen in this way. There’ll be massive demand destruction in energy and many other factors to change the outcome (including a likely global recession).

But this is roughly 2.5% of Australian GDP carried off as economic rents thanks exclusively to war-profiteering. Ripped straight out of businesses and households on the east coast before they recoup costs (where they can) in just the next year.

Next, we must add an additional $35bn in mortgage interest payments as the RBA pointlessly tries to stop it:

Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.

A total of $86bn in lost spending power will be concentrated in the four eastern states of NSW, VIC, QLD and SA. WA and ACT won’t see the energy shock.

That’s the same size as JobKeeper, except in reverse. Let’s call it JobSmasher. Divided by the average wage, this is 1.1m jobs smoked.

Under this kind of strain, something in the eastern economy is going to snap.

I suspect it will be consumption and house prices that will crater together in the next few months under the combined bombardment of an income and wealth shock.

But you go ahead and do nothing, Albo.

Houses and Holes
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Comments

  1. I'll have anotherMEMBER

    Lol. Job smasher. I was thinking about Job Seeker welfare payments compared to the energy bills and wondering how they correlated. Good article.

    • Strange EconomicsMEMBER

      Windfall profit tax on Energy companies exports
      (like the UK) would pay everyones energy bills,
      and a new FHB super grant to pump house prices.
      Or gas reservation.
      Easy !

  2. “Do Nothing” is harsh. JobSmasher urgently seeks wage-smashing mass immigration flows back into Sydney and Melbourne. Although, as Abul Rizvi frets, this revival is proving more effortful than LibLab might have expected.

    • Strange EconomicsMEMBER

      Duttons too busy chasing unicorns for 2050 –
      Nuclear power and sub fantasies..Oh and “Carbon Capture”.

  3. RomulusMEMBER

    Albo and co are really giving off Biden/Dem vibes

    Here’s a question – if wheat exporters were able to do the same thing sell their wheat overseas at hugely inflated prices and limit domestic supply which was causing people in Aus to starve would the government intervene there? Or is the ability to export and deliver according to the contract so sacrosanct they are willing to put Aussie lives and livelihoods at risk?

  4. Michael West had a good chat about the energy crisis a few days back and the takeaway punchline to me was how it was such a great opportunity to make the gas cartel pay corporate taxes. It’s hard for them to successful winge about sovereign risk when they are not paying corp tax, are using a finite resource, are overcharging locals and causing a recession.
    Even the Liberals would struggle to defend them given they wanted a gas led recovery.
    Use the crisis!
    https://youtu.be/f0Tz5BTpcBY

    • Display NameMEMBER

      The LNP would have no problem with it as long as they are getting donations. They are clearly transactional. All the time. Colour coded spreadsheets for flood disaster relief. *Everything* is political for the LNP. And that is ones of the reasons they failed at pretty much everything they were responsible for federally.

  5. Interesting take H&H, I like the relativities v Jobkeeper as a key question on the QE + Fiscal front was “ok, assuming all of that has either been deployed or ‘saved’, how much of it is being reversed and what is the impact? Even if you do so in an orderly fashion, you end up back at pre COVID, which was weak economically anyway + the hangover of the business destruction that covid policy provided (yeah you stimulated, but only x% of that actually went to people and businesses that were impacted, the rest was captured by those you weren’t and they either held it, spent it on RE or luxury cars and paying 120% over the money for a rolex).

    Unless something changes globally in a hurry (i.e Putin has a heart attack) it doesn’t look pretty

  6. Diogenes the CynicMEMBER

    This is existential for the ALP -> they need to quash the gas/coal cartel face being a 1 term government and decades in the political wilderness. The clock is ticking…

    • RomulusMEMBER

      I’d say the green/independent flank for the ALP is wide open if they continue down this path. Crossbench will be even bigger – say goodbye to any hope of majorities for either party.

  7. have done similar back of the envelope calcs for eu too – they are in a recession now (see eg german retail sales) heading for a prolonged depression (yes, deliberate use of that word, not other way to describe it). the ecb is setting up to repeat the 2008 mistake of hiking in the depths of a recession, me thinks they will be forced to defend peripheral spreads and are heading for a jpy style depreciation of the eur – probably the clearest cut trade there is right now

  8. DingwallMEMBER

    the deposing of Kevin Rudd had upset many
    Poor Many ……….. weird name but he must have been the only one upset by the removal of that @&##%$^ ………… KRudd was KRudd …….

  9. Good, hopefully Labor understand this level of macro impact, which is around 4% of GDP, and stop bleating about the little issues & making excuses for taking weak or no action as they have been. A 4% hit to GDP is going to have a massive impact and ensure one term, many voters have signalled their discontent by not voting #1 for a major, next election could see the duopoly broken.

    • How much of an INCREASE in GDP would occur with domestic gas at around $7? Or at least improved productivity?

  10. Jumping jack flash

    “None of this is going to happen in this way. There’ll be massive demand destruction in energy and many other factors to change the outcome (including a likely global recession).”

    This

    Great analysis. The demand destruction has to be factored in and demand is far more sensitive to interest rates than i think they realise.

    The economy is mostly debt spending and that encompasses our wages and jobs which feeds back into demand for debt which underpins demand.

    It is also not wise to just focus on mortgages and mortgage rates although mortgages are by far the largest portion coming in at 2 trillion dollars, and hard to miss. Total consumer debt must be considered as well and that will certainly be affected by rising interest rates as well, probably moreso.

  11. The real joke here is that you opposed Snowy2 because it was just another “white -elephant” yet here we are taking it up the @$%# from your favored “transitional fuel”. This always was going to happen. The solution is more renewables, more storage solutions and a better grid (maybe even one even reaching as far as the west coast)

    Storage (Pumped hydro Dams, Battery, compressed gas….) are our only viable long term solutions and they’re starting to look real cheap when compared with…, well just about every other non-solution.

    • Fishing72MEMBER

      Why do you think the green energy oroducing multinationals will behave differently to the fossil fuel multinationals? I’m assuming they’ll be the same companies and the gouging will be exactly the same. Wind and solar are free to produce but gas is also free to extract in Australia.

      What’s the difference?

      • Good question: To be honest I don’t believe that these companies will change but their ability to profit from their absolute monopoly position (on electricity provisioning to households) will change.
        Household Battery storage will quickly eliminate their ability to extract a premium price for “Peak Electricity” so if Battery costs per cycle fall below say 10c/kwh cycle then cheap electricity (which will be mid day at that point) will sell for practically nothing. So average electricity prices (at the residential level) will have trouble exceeding say 20c/kwh.
        Businesses and industrial consumers will be forced into longer term contracts which is fine with me.
        Renters well I think the government will step in and limit gouging the poor (plus there’s only so much money you can get from a practically broke person)

        Battery plus Solar PV well that’s the holy grail for residential houses (and it’s real close to being viable)

      • Yes. The world is slowly learning that neoliberalism = serfdom for the masses.