Chris Richardson: Reserve and tax super profits on gas

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You know you’re winning a debate when consensus followers like Chris Richardson are climbing aboard after years of ignoring a critical issue:

After this month, however, consumer cash flows will be fully exposed…Much of the pressure is coming from energy costs.

…Are there solutions? Economists aren’t usually fans of policies such as domestic gas reservation, but the current mess (including, as the Australian Competition and Consumer Commission notes, a lack of competition selling into domestic markets) means reaching for second-best policy solutions.

…Yet even a better gas trigger would just be a Band-Aid, and the tax side of this equation needs to be considered too.

The tax revenue this nation gets from the Petroleum Resource Rent Tax (PRRT) has stayed in the slow lane even though Australia now vies with Qatar and the US as the world’s largest gas exporter.

The PRRT was revolutionary when it was first introduced here, but it was designed in the 1980s. Back then, Australia was an oil producer rather than a gas producer, and economists thought the government should use the cost of capital to the miner to inflate costs incurred along the journey to making a profit.

But now we’re a huge gas producer, and economists realise that it’s the government’s own cost of capital that’s a better way to factor up the deductibility of costs over time.

Just two months ago Mr Richardson was still running around implicitly defending the evil gas cartel by arguing there was nothing we could do. Great to see you getting on board, mate!

The criminal conspiracy known as the evil gas cartel is also already tightening the east coast market again. The gas price is back to $19Gj today and with NEM prices in lockstep:

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Richardson is right. Without immediate action, the economy is going to crash as the RBA chases energy prices it cannot affect.

We need to return gas supply to a classic utility “cost plus” model for the Australian economy. This is done easily by applying a price trigger to a domestic reservation regime and Alan Kohler yesterday showed how generous is my favoured $7Gj given gas extraction costs are $5Gj (and on a cash basis much lower):

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$7Gj is also comfortably above the rate of return required to trigger further gas extraction in NSW and NT.

Time to break the EVIL GAS CARTEL!

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.