How to solve an inflation, deficit and energy crisis as Australia looks to break vicious cycle
“No question is so difficult to answer as that to which the answer is obvious.”
Best known as a Nobel prize-winning playwright, the Dublin-born George Bernard Shaw also was a political activist who courted controversy, adulation and outrage in equal measure.
If he were around today and asked what Australia could do to solve its inflation, budgetary and cost of living problems — while simultaneously bolstering its manufacturing sector and hence employment — he no doubt would have had a quick solution.
While the answer to a large chunk of the challenges we face is obvious, it is a question with which the federal government is having great difficulty.
The answer is gas.
Gas is instrumental in setting our electricity prices. Gas is the fundamental energy source for many Australian industries. And gas was supposed to be the transition fuel between coal and renewables.
For a country so endowed with natural resources, the idea that we should be faced with critical energy shortages — and rapidly escalating costs that threaten to undermine our future — is bizarre.
The Albanese government pledged to reduce power prices as part of its efforts to rein in the cost of living and as part of a broader strategy to reinvigorate the manufacturing sector.
Electricity prices, however, are set to soar next year on the back of rapidly escalating costs for the very energy sources that dominate our exports: coal and gas.
A fortnight ago, the Resources Minister, Madeleine King, pulled back from imposing strict new controls on gas exporters, instead signing a new agreement with gas exporters to ensure adequate supply. The deal, however, will do little to lower gas prices.
That’s caused something of a crisis within Cabinet as Industry Minister, Ed Husic, has stepped up pressure for stronger action, a course the new government appears reluctant to take.
Shortages among the plenty
Australia is the world’s biggest exporter of Liquified Natural Gas, shipping 87.6 million metric tons in the year to the end of July, well above Qatar’s 77.4 million metric tons.
And yet, a few months ago, the Australian Consumer and Competition Commission’s put out this alarming assessment of our energy situation which forced the federal government to take action.
“The east coast gas market is forecast to have a supply shortfall in 2023 and domestic energy security will be at risk.”
The tiny cabal of global energy giants that ship that gas offshore has been raking in enormous profits this year, ever since Vladimir Putin’s brutal and botched invasion of Ukraine sent global energy prices soaring.
It’s worth noting that the gas exporters don’t own the gas they export. The gas — like all our natural resources — belongs to ordinary Australians. The companies merely have a right to extract and sell them.
This graph shows gas prices out of Queensland. The thick blue line is a measure of domestic prices while the broken blue line represents the cost of gas production. That yawning gap is the profit margin while the dots are pricing offers made to local buyers and businesses.
Since the competition regulator compiled this graph a few months back, the situation has further deteriorated. It estimates LNG netback prices — a domestic price measure — will hit just under $67 a gigajoule in October and remain around $60 for most of next year.
At those prices, a large number of local businesses will hit the wall.
“Some users noted closure of operations was becoming a very real possibility in the short term and more significant demand destruction was likely over the longer term,” the ACCC report stated.
Vicious cycle of energy, inflation and interest rates
Energy costs are among the single biggest contributors to the inflationary bonfire currently sweeping the globe.
Australia should be in the unique position of being almost immune to the calamity.
Except that last week, Alinta boss Jeff Dimery set the cat amongst the pigeons when he predicted a 35 per cent hike in the cost of electricity. That follows recent price jumps of up to 20 per cent that have caused a spike in the cost of living.
Those increases are forcing consumer prices higher which, in turn, is pushing the Reserve Bank to raise interest rates at the fastest pace in history.
Gas plays a vital role in electricity generation. It is the final ingredient, the fuel that is used when coal and renewables fall short. And because it is that key final fuel, it sets what is known as the marginal price. So, when gas prices rise, so does the cost of electricity.
Why is there a shortage?
When gas producers discovered a way to extract the huge coal seam gas deposits in Queensland and northern NSW in the early part of the century, it sparked a land grab, not unlike the Victorian gold rush of the 1800s.
But in their haste to develop the projects, the big global gas giants overestimated the amount of gas they could extract only after they’d signed long-term export agreements, mostly with Chinese buyers.
And despite promises that the east coast market would have plentiful supply, those supplies began to make their way offshore, at one stage allowing producers to charge domestic customers a premium.
A big problem is a lack of competition.
Between them, the three major exporters exert control over 90 per cent of east coast gas reserves, allowing them to wield huge pricing power. There are joint ventures, joint marketing arrangements and exclusivity agreements which, when combined, have put them right on the cusp of competition law.
“This is resulting in a material reduction in the number of producers competing to supply gas into the domestic market, reducing competition,” the ACCC has noted.
It found competition between gas producers was “ineffective” with an “adverse effect on the ability of users to procure gas on competitive terms”.
What can be done?
Quite a lot, as it turns out. But none of it is without a political cost.
Many European countries and the UK delivered financial relief to businesses and households after energy prices spiked in the wake of the Ukraine invasion. In the UK’s case, the Tory government under Boris Johnson then levied the energy producers a super profits tax to help pay for the support.
The prime minister ruled out any kind of windfall profits tax shortly after assuming the top job and a “tax solution” is something the new Labor government is loath to pursue.
Then there are domestic price caps. That’s an idea that has the support of both business and unions — led by manufacturers and the Australian Workers’ Union — both of which are alarmed by the prospect of imminent forced closures and unemployment.
Lastly, there are calls from the Australian Industry Group to overhaul the Petroleum Resources Rent Tax. With its huge concessions to write down previous investment and past losses, it has barely managed to raise any revenue from a gas export industry that dominates the globe.
Last year, the government collected around $800 million under the PRRT. That’s about half the amount collected in 2000 before we had an east coast gas industry.
Qatar, in contrast, was on track to collect around $26.6 billion from its gas exports. Those kinds of numbers would go a long way to solving the revenue and deficit problems before us.
So far, the new government appears unwilling to confront the issue head-on and is hanging its hat on a tightened Code of Conduct for the gas exporters, a document initially put forth by the Morrison government.
It didn’t work then. Perhaps the answer is more obvious.