January 19, 2014
By the end of this new year eastern Australia’s $65 billion LNG industry will be set to send its first shipment to Asia while Holden will be a quarter through its four-year process to cease manufacturing here.
Our economy is in transition. Therefore, it’s critical that policymakers focus on how to efficiently facilitate the structural shifts underway, rather than give credence to the ideas promoted by those who would prefer they be undone.
Australia’s gas supply industry is focused on both domestic and export markets. Manufacturers are among its most important customers and it has a stake in the sector being reinvigorated — but the policy answer should not be to pursue this at the expense of one of the great success stories of our 21st Century economy.
In particular, the furphy that the nemesis of manufacturing is energy costs should not be allowed to continue to flourish.
Structural adjustments occurring within our economy have had a concentrated impact on manufacturing due to the sector’s trade exposure, small scale, relatively high costs, and the recent strength of the Australian Dollar.
A policy that manipulates the domestic gas market to deliver below-market gas prices will not alleviate the many challenges facing manufacturers. But it will drive away investment in the gas market and hurt the wider economy.
Successive Australian governments have worked for decades to unpick such industry policy because they have realised such strategies deter the very investment needed to drive new projects, industrial expansion, new employment, and higher wages.
Contrary to the claims of gas reservation boosters, there is no simple or plausible “solution” to the challenge of rising gas prices, perhaps other than the production of more gas. But don’t take the gas industry’s word for it.
The Federal Government has just spent eight months evaluating policy options and over the Christmas break it released its Domestic Gas Market Study. This report says: “The diversion of gas to the domestic market under a reservation policy could have both short and long-term effects on the price and availability of gas. Where the supply side is already tight, the importance of incentivising the supply response grows and the chances of (reservation) policies causing net losses dramatically increase.
“A reservation policy (creates) a perverse signal which diminishes incentives for bringing on new supply.”
Australia is currently witnessing an unprecedented level of investment in the development of LNG projects. The domestic flow-on effect of this is, to again quote the Government paper, “rising prices (but they) do not automatically mean the market has failed or that intervention is necessary.”
The Government goes on: “All users will need to adjust to prices being set in a more dynamic and higher cost environment, particularly those domestic gas users who have had to adapt quickly after decades of fairly steady market fundamentals.”
It also notes, “Action by governments to remove any unnecessary technical and regulatory barriers to development will be important in bringing on additional gas supply, enhancing project completion and improving market outcomes.” This point is of particular relevance in New South Wales and Victoria where state governments have allowed their political fears to overwhelm their duty to look to the community’s long-term interests.
The solution is not to handicap a star industry. The gas sector is already delivering great benefits to Australians and is capable of doing much more because it offers a product that Asian customers want and the security of supply they value.
Impeding the oil and gas industry from taking optimal advantage of this opportunity – one that other countries are eager to capture if Australian producers falter – in a vain effort to ameliorate the decline of manufacturing in some states is not rational.
A clear-eyed assessment of the facts shows the only way to put downward pressure on gas prices – and therefore the best way to support residential and industrial gas buyers – is to develop a regulatory environment that attracts new gas project investment.
It is time for reservationists to address themselves to the factors affecting the competitiveness of the Australian economy – productivity, tax, regulation, skills and labour market flexibility. It is this which will give all companies – including those in the manufacturing sector – the best chance to adapt to the changes occurring throughout the economy.
First published in the Australian Financial Review on 20 January.