Just as the Irish exported huge quantities of food during the famine that cost nearly one million lives, Australia is exporting record amounts of gas in the middle of an alleged 'energy crisis'. The 'logic' of free trade is behind both absurdities.
Production of gas on our east coast has risen by about 20 per cent in the last three years in large part because farmers have been unable to prevent the spread of fracking for Coal Seam Gas (CSG) in Queensland. While you wouldn't usually associate a surge in production with a 'shortage', you also wouldn't expect a government to argue that tax cuts for big business are a good way to boost wages. We live in confused times.
While there is clearly no shortage of gas molecules being extracted in Australia, the price that Australian electricity generators and manufacturers are being charged for those molecules has risen nearly threefold. And high gas prices have led to high electricity prices and recent blackouts. So, what's going on?
Until 2014 all of the gas produced in South Australia, Victoria, Bass Straight, NSW and Queensland was sold, via an extensive pipeline network to electricity generators, industrial users and households along the east coast. The gas was abundant, relative to local demand, and in turn it was cheap.
But while abundant gas sold at low prices to Australian industry might be good for manufacturers, it wasn't much fun for the gas companies, so in 2007 the gas industry set about a long-term and very expensive plan to push our gas prices up significantly. And, as the recent squealing from the electricity and manufacturing sector clearly shows, the gas industry has succeeded in their goal.
The problem for East Coast gas producers was that while Asian customers were willing to pay a higher price for Australian gas than the average Australian styrofoam factory or fertiliser plant, there was no way to get gas from Brisbane to Tokyo. While it's straightforward to rent a ship and dump a load of coal on it, in order to export gas in those ships with the big bubbles on them the gas must first be liquefied, hence the term liquefied natural gas (LNG). And unlike a coal loader, a gas liquefication plant is an enormous bit of kit that costs tens of billions to build.
The next step shows that you can't fault the gas industry for lacking in ambition (or was it greed?). Having realised that they could triple the price they charged for the gas we give them (there are no royalties payable on much of the gas produced in Australia), the gas industry set out to build not one, but three enormous gas liquefication plants right next to each other in Gladstone at a combined cost of about $60 billion dollars. After some big cost blowouts by 2014 the East Coast producers finally succeeded in linking to the world market and, in turn, their 10-year plan to lift our gas prices.
It's remarkable that the PM and Minister Frydenberg are willing to feign surprise that the gas price has done exactly what the gas industry has been aiming for a decade. Back in 2014 a briefing note by Credit Suisse on the prospects for the gas exporter Santos, stated that 'Santos now argue that its aim in (building its gas export facility) was always as much about raising the domestic gas price'.
Here's how it works. When there were lots of gas producers in Australia selling to lots of gas customers in Australia the price was set by the willingness of the last customer to pay for an extra molecule of gas. As long as that last customer was willing to pay a price that was higher than the cost of getting the extra molecule out of the ground the manufacturer would have once found a gas producer willing to sell it to them.
But that was before the gas industry spent $60 billion building export infrastructure. Now Australian gas producers can choose between selling our gas to local manufactures at the old price or selling it to Japanese or Korean customers at the much higher world price. Which do you think they chose?
Proper capitalists don't like to discriminate on racial grounds, they are simply in it to make a buck. The gas industry isn't refusing to sell gas to Australians, but they will now only sell to Australian buyers at prices and terms that are at least as lucrative as they can get from Asian buyers. Contradicting claims of a 'shortage', an Origin Energy spokesperson said this week that: "Origin has gas supply available to contract to customers over the coming winter. Notwithstanding the current tight supply-demand balance in the market, it is Origin's view that gas will flow to where it is required."
The key phrase in the above quotation is 'where it is required', and this is where the hypocrisy of the Turnbull government is revealed in full. The whole point of 'free trade' is that its proponents believe that resources should flow around the world according to who 'values' them the most, where 'values' means 'willing and able to pay the highest price'.
That was the Irish's problem. It wasn't that they didn't 'demand' food. It was that they couldn't pay as much for it as richer people in other countries were willing to pay. The English parliament held lengthy debates about the 'fairness' of importing food from a country suffering starvation but, like the Australian parliamentary debates about gas exports in recent years, the 'free traders' won the day.
If Malcolm Turnbull believed for a minute that Australia needs to reject protectionism and embrace free trade he would be explaining to the Australian people that it is 'better' to sell gas to Asians at a high price than it is to sell it to Australian manufacturers at a low price. But as his backflips on climate change and tax policy show, the current PM lacks the courage of his convictions.
Like our best beef, lobsters and IT workers, Australian gas is now being sold to the highest offshore bidder. But rather than explain the 'benefits of free markets', the PM is pretending the rise in gas prices is the fault of environmentalists or the states. He dares not say that the 10 year, $60 billion plan to export gas at high prices is working as planned. If he doesn't know that removing limits on CSG extraction would only increase the quantity of gas we export rather than reduce the domestic gas price we'll know his economics are as bad as his politics.
Amartya Sen won the Nobel Prize for his work on the economics of famines. He simply pointed out that rich people don't die in famines as famines are not caused by an overall shortage of food, but a shortage among those who can't afford it.
There is no overall shortage of gas in Australia. Any company willing to sign a long-term contract promising to buy gas at three times the price they used to pay will, according to Origin, be able to secure all the gas they need.
You can see why Mr Turnbull would rather blame the states and environmentalists than explain clearly that so-called 'free trade' has losers as well as winners. But such blame shifting will do nothing to lower gas prices, or help avoid blackouts next summer.
Richard Denniss is the chief economist for The Australia Institute. Twitter: @RDNS_TAI
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