The Australian gas question is now existential. The east coast gas cartel will be controlled or the Australian economy and everybody else within it will be destroyed.
Today’s gas and electricity prices are an illusion created by the shutdown of one Curtis Island LNG export train. For the past month, this has freed enough gas to drop local prices to still nosebleed levels of $15-20Gj from $65. Yesterday it popped to the top of the range and power prices are following like clockwork:
These are the same highly destructive prices that triggered the original creation of the Australian Domestic Gas Security Mechanism (ADGSM) in 2017. They will deliver a 70% rise in utility bills over the next year and add 4% to inflation over two.
They are probably worth 1% higher in the cash rate and $1-2tr in lost housing wealth. Not to mention a devastating drop in real income targeting the poor.
But this shock pales into absolute insignificance when measured against what is coming in days when the Curtis Island train reopens.
At that point, the criminal gas cartel will automatically tighten the local market and seek to bring current global prices to Australia.
That will mean a local gas price of…wait for it…$110Gj when converted to AUD:
As we know, gas prices set the marginal cost of electricity and that price will go to roughly $1200MW/h:
These two price spikes will deliver a difficult-to-imagine CPI shock in the realms of 30% over the next year and 50% over two.
At this point, any precise estimates of the economic fallout are impossible and rather pointless. Simply put, it will require a cash rate so far above what Australia’s household debt profile can cope with that that the property market will cease to exist as a viable asset class.
The banking system will likewise collapse, and be nationalised in due course. The real income shock will be materially worse than the Great Depression.
You might think that these FACTS would penetrate the thick skull of Australia’s MSM and, in particular, its august business paper, which is the custodian of good economic policy.
But no. Today I give you Michael Smith of the AFR and his treatise on why nothing should be done to prevent Australian Ragnarok:
Tokyo | Japan and South Korea, two of Australia’s key trading partners, have sought assurances from the Labor government that it will not divert crucial gas exports needed to power their economies for domestic use amid growing concern in the region about crippling power shortages.
In short, blah, blah, blah, sovereign risk, blah, blah, blah.
Smith goes out of his way to find upset Japanese and Korean gas importers without once mentioning that 71% of Australia’s east coast gas goes to China.
No Chinese interests are interviewed at all.
Nor does he mention that Korean gas imports are effectively government-owned via Kogas. Despite being listed, anybody that thinks Tokyo Gas is not a Japanese national champion is mainlining gas into his veins.
These firms are not part of any “market” that matches the name. They are sent out into the world by their governments to capture the raw materials and rents that fuel their mercantilist economies.
These are North Asia’s national champions. They have sovereign objectives and are comfortable operating within cartels, which is what this is all about.
In short, no matter what we do about the gas shortage, they will keep coming to Australia. They have no choice. They do not have the resources that they need. Quite aside from the fact they pay no tax here!
So, when we assess the sovereign risk of keeping enough gas for ourselves before our allies enjoy it, let alone our enemies, the calculation is pretty simple.
Will the governments of Japan and Korea really be upset if we calmly refuse to bankrupt ourselves to prevent Pax Americana’s southern IndoPacific anchor from sinking overnight?
And, given Japan and Korea are already caught in the energy calamity that the AFR wishes to foist upon us, and seeing their investment universes radically shrink as autocracy spreads, will they balk at future Australian investment?
This fear is a joke.
So, Albo’s cowards must impose a $7Gj gas price on the criminal gas cartel via an export levy or ADGSM trigger NOW. Doing so will deliver the complete opposite of the AFR’s infantile fears. It will finally establish energy security of supply for all, show our Asian customers that we are grown-ups, and unleash a torrent of future investment into decarbonisation fuels.
Not to mention, it will prevent national economic suicide.
