JOHN MENADUE. A rigged gas market and market failure.

Apr 27, 2017

Yesterday, the government announced that it would impose an Australian Domestic Gas Security Mechanism on gas exports from July this year.  This will give the government authority to limit companies’ gas exports if they are emptying Australian gas reserves to meet overseas export contracts.  Two years ago – I drew attention to the market failure in gas policy. I have reposted below that article of April 28, 2015.  John Menadue 

Before the last election we had a lot of exaggerated talk about the carbon tax forcing up prices and even closing down Whyalla. The cost rises in electricity as a result of the carbon tax were in fact quite modest. The largest increases in electricity prices were due to over investment in ‘poles and wires’. They were not due to the carbon tax.

But any problems allegedly caused by the carbon tax were minor compared with the problems that we now face over gas prices. The CEO of Incitec Pivot, James Fazzino, has described Australia’s national energy policy as a ‘train wreck’.

It is suggested that there is a world market for gas and that for economic efficiency reasons; we should let the market operate so that our domestic prices would reflect world prices. But in fact domestic prices in Australia are substantially above world prices. Comparative prices per gigajoule are as follows:

Qatar     $2.00
USA        $4.00
China     $5.00
Australia $7.50 to $10

It is noteworthy that Australia is the largest exporter of gas in the world and large amounts of the gas supplied to China come from Australia after a 14 day sea voyage.

In my blog on this subject on 22 July, 2014, ‘Power prices – we ain’t seen nothing yet!’ I pointed out that we have some of the richest energy and gas fields in the world. Tony Abbott has said that Australia aspires to be the ‘affordable energy capital of the world’.

But if so, why are our prices so far above world prices? The reason is quite straightforward – the gas market is rigged by a few players. In 2012 the OECD observed ‘These [gas] markets are far from being liberalised. [They are] characterised by lack of competition both upstream and downstream.

As a result of these rigged high prices for gas in Australia there are likely to be severe economic and employment consequences. Deloitte Access Economics estimated last year that if gas prices continued to rise, our manufacturing sector alone will contract by as much as $118 b. by 2023, with nearly 15,000 jobs lost. It suggested that the mining sector might contract by $34 b. and agriculture by $4.5 b.

According to Michael West in the SMH–all-the-way-to-the-bank-20150424-1msfgb.html, Manufacturing Australia has just warned that the manufacturing sector is projected to decline by up to $120 b. by 2021 unless this issue of gas prices is addressed urgently, with projections also suggesting between 13,000 and 83,000 direct manufacturing jobs at risk.

The CEO of Incitec Pivot has announced that as a result of high gas prices in Australia his company has decided to build a $1 b. ammonia plant in Louisiana rather than in Australia.

As Michael West points out, BHP Petroleum has made it quite clear that there is plenty of gas in Australia. It’s CEO, Mike Yeager, said recently ‘We want to make sure that the market knows that the Bass Strait field still has a large amount of gas that’s undeveloped … we have a lot of gas in Eastern Australia that’s available.  It’s more important to let the citizens of Victoria and New South Wales and to some degree, even Queensland, know that there’s plenty of gas to supply these provinces for – you know – indefinitely’.

The US reserves adequate gas for domestic use. I assume that is because it has come to the conclusion that there is a rigged market for gas and the assertion of its national interest is important. In the Michael West article, he quotes Manufacturing Australia as saying ‘A handful of economic interests control almost three quarters of current reserves while a similarly small group controls almost 90% of Australian gas production.’ These major producers say that they engage in ‘joint marketing’ which is really a euphemism for market rigging.

This rigged market is forcing up domestic prices. We are told by vested interests that in response to these increased domestic prices we must embark on coal seam gas projects in some of the most fertile farmlands in Australia. The Business Council of Australia is a cheer leader in supporting this rigged gas market and urging expansion of coal seam gas exploration and production.

If our domestic gas prices reflected world prices and if world supply was not rigged we would have much greater supply and lower prices. In such a transparent and open market, the development of coal seam gas would be uneconomic.

Until such time as the government and the community is satisfied that there is a genuine and transparent market for Australian gas we should reserve adequate gas for our domestic use. Some would call this protectionism and rejecting market solutions. But the market is rigged by a small number of producers. It is a classic case of market failure.

As Michael West has put it, ‘There is no gas market. There is a cabal.’

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