John Menadue–Power prices – we ain’t seen nothing yet!

Jul 22, 2014

We have seen wild exaggeration about the effects of the carbon tax on prices and the economy. It has all turned out to be quite a fizzer. The price increases we have seen have little to do with the carbon tax and the economy continues to grow steadily. Whyalla has survived.

But we have a real problem just around the corner in energy policy. The price of domestic gas is likely to at least double in the next year or so as the domestic price of gas rises to meet the international price. Compared with the impact of the carbon tax, this increase in domestic gas prices will be quite severe.  By comparison, the carbon tax will be seen like a blip on the horizon.

Deloitte Access Economics has just warned that if the gas rise goes unchecked, the manufacturing sector alone will contract by as much as $118 billion by 2021, with nearly 15,000 jobs lost. It suggests the mining sector might contract by $34 billion and agriculture by $4.5 billion.

Australian gas consumers are naturally concerned because of the $70 billion coal seam gas export project at Gladstone. It is nearing completion and it is likely that our domestic prices for gas will increase to match the export prices from Gladstone.

Gas is vital for a whole range of industries in Australia – electricity generation, glass and plastics, fertilisers, cement, metals and ceramics – and of course home heating and cooking. Our manufacturing sector has been struggling with the high dollar, but relatively low gas prices have been very important. That is going to change.

As Bruce Robertson in the SMH has pointed out, historically our east coast had relatively cheap gas from Bass Strait and the Cooper Basin. It was a domestic market largely shielded from world prices. That will change dramatically with the export gas terminal in Gladstone which will draw gas out of the domestic market into the export market because of higher prices overseas, particularly in Asia.

The coal seam gas moratorium in NSW and Victoria is peripheral at the moment. The main driver of increased gas prices in the years ahead will be the catch-up to export prices driven by the very large coal seam gas project at Gladstone.

This seems absurd for a country that has some of the richest energy and gas fields in the world. Tony Abbott says that Australia aspires to be the ‘affordable energy capital’ of the world.

We need to seriously consider reserving necessary gas for Australia’s domestic purposes including the 40% of our gas used by industry.

Free marketeers will tell us that we should not interfere in the market – that we should let domestic prices rise to export prices, otherwise it will discourage investment. But how ‘free’ is the market? There is concentrated ownership of reserves and limited competition with tightly held gas fields reserved for LNG export. The major companies have joint marketing arrangements which limit competition. There is really a cosy club of big international players that distorts the market.

We have given some of these major international companies the right to reserve our gas for export. Some of our very large gas resources are, or will be, held back for export where there will be higher prices.

In 2012, the OECD observed ‘these [gas] markets are far from being liberalised. [They are] characterised by a lack of competition both upstream [where relevant] and downstream’.

Many countries insist that their substantial gas reserves must pass the test of ‘value-adding’. Gas is reserved for domestic use if it can be demonstrated that that ensures greater value for the supplier country. After all, the gas belongs to the country and its people – and not the international companies. In WA the government has enacted legislation to shield domestic gas consumers. In the US, domestic gas prices are kept low by limiting export licences. In different ways most other countries with large gas reserves ensure that there is adequate domestic supply.

On the ABC on the 30th April this year, asked by Tony Jones ‘Should a national energy policy include putting aside gas reserves for domestic use’, Jeff Kennet replied ‘Well, certainly, if you don’t provide for your own you, very quickly find out that your own aren’t there or they are of a sub-class in terms of the region in which we live’.

The ‘debate’ about the carbon tax is really just a curtain-raiser to the very serious discussion we need to have about the reservation of Australian gas for domestic use.

To what extent are we prepared to limit export licences for gas until the domestic market is adequately supplied? I am not persuaded that the large international gas companies will put Australia’s interests first.

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