Ah, the east coast gas crisis. It’s still going. It’s not going to stop.
And now the blame game is in full swing. But before we point fingers at various parties, let’s review the situation…
The east coast of Australia has a looming gas shortage that will hit in the next few years. In fact, it’s already hit.
The thing to understand is that there is no such thing as a shortage in a free market. If there is, prices rise to ensure that supply and demand balance out.
What’s happening now is that higher prices are working to destroy demand. And if not enough demand is destroyed, prices will keep rising until the job is done.
But it’s not a completely free market. When prices rise too far, it elicits a political response. Which is what is happening now, and why you’re seeing this in the media every other day.
How did it get to this point?
Put simply, Queensland is one of the few states in Australia to allow onshore unconventional gas exploration. That led to the discovery and development of huge coal seam gas reserves in the Bowen and Surat Basins.
This in turn led to the development of a major liquefied natural gas (LNG) export industry at Curtis Island, just off the coast of Queensland, near Rockhampton.
The problem, however, was that the LNG export players got overexcited and planned for more gas exports than was available via coal seam production. To make up the shortfall, the exporters sucked gas from the Cooper Basin too, which previously went to domestic and industrial users on the east coast of Australia.
This is how the problems started. Now, gas production in the prolific Bass Strait is in decline. State governments in NSW and Victoria won’t allow onshore gas exploration and development, despite the presence of huge gas reserves in both states.
As a result, east coast gas consumers are paying more for their gas than international consumers of that same gas!
It’s comical, and yet another sad indication of the state of politics in Australia. There is no foresight, no leadership, no anything at the state or national level. There is only finger pointing.
Meanwhile, job losses are looming, as the Financial Review reports:
‘Industrial gas users are facing price demands in new contracts of $10-$16 a gigajoule or higher, in some cases three times more expensive than expiring contracts. The Australian Competition and Consumer Commission last week issued “benchmark prices” for industrial users based on LNG spot prices in Asia, signalling that Queensland users should only be paying about $5.87 a gigajoule, while Victorian manufacturers would have to pay at least $2 more to cover the cost of transporting Queensland gas south.
‘That leaves a large price gap and creates headaches for industrial users such as chemical makers, some of which need gas at $5 or $6 to keep their operations viable, said Chemistry Australia chief executive Samantha Read.
‘She pointed to a 2014 Deloitte study that forecast losses of 14,500 manufacturing jobs between 2014 and 2021 if gas prices reached $8-$10/GJ. But at current prices the impact on jobs and the economy is set to be “much greater”, she said.’
I wasn’t aware Australia had any manufacturing jobs left. If these jobs go due to an energy policy nightmare, it really will be lights out for the manufacturing industry.
There is a solution out there. But it will take some time for new supply to hit the market. I have about five junior gas players in the Crisis & Opportunity portfolio that are developing existing projects now to supply a thirsty east coast market.
Australia has some of the largest gas reserves in the world. But due to regulatory failure and a nasty energy bear market during 2014–16, which saw investment in the sector plummet, we’re now in ‘crisis’.
No doubt the Reserve Bank will be monitoring all this closely. They will see rising energy costs and its effect on household bills as an unexpected tax. In an environment of flat real wages growth, it’s certainly not a situation conducive to growing household expenditure.
It’s just another reason for the RBA to sit on their hands — again — when they meet to discuss monetary policy tomorrow.
Meanwhile, politicians will pretend the economy is strong by generating growth the sneaky way. That is, by targeting population growth through strong immigration.
More people means more demand for credit and housing, which means increased demand for goods and services, which in turn creates jobs and economic growth.
And politicians can then tell you how good we’re going, and that if it wasn’t for them, things would be much worse.
Seriously, why do we keep voting them in?
Editor, Crisis & Opportunity