The Australian reports this morning:
‘Queensland’s three big gas export plants are shipping at their strongest rates in seven months as global LNG prices rise to four-year highs and southern winter demand pushed Sydney and Melbourne gas prices to records last month.
‘The latest Gladstone Port data shows the $70 billion of LNG projects built to export gas through six big Curtis Island freezers boosted August exports by 6 per cent to a seven-month high of 1.76 million tonnes, representing an annual rate of 20.7 million tonnes a year.’
Can you see the problem for Scott Morrison here?
He’s talking about reducing electricity costs for Australians when global LNG prices are at four-year highs, and rising.
About 10 years ago, Australia made the decision to develop a LNG export industry. Multinational oil and gas companies invested $70 billion to build a number of LNG export terminals on Gladstone Island, in Queensland.
That decision brought Australia closer to the international gas price, and saw us surrender the benefits of our abundance of cheap gas.
Thanks to China’s horrendous pollution, they now have a voracious appetite for relatively clean natural gas. In this environment, Australia’s gas price is of course moving towards the price Asian importers will pay.
But Morrison thinks he’s going to get prices down?
How will energy prices go down?
Hmmm. That’s a worry, given Australians are now banking on it. Another article in The Australian states:
‘Scott Morrison’s pledge to scrap Malcolm Turnbull’s national energy guarantee and drive down energy bills has seen the Coalition extend its lead over Labor in relation to which party is best placed to maintain Australia’s energy supply and keep power prices lower.
‘On the question of pulling out of the Paris climate-change agreement following Donald Trump’s decision to withdraw, 46 per cent of voters said they would support Australia doing the same if it resulted in lower electricity prices.’
As always, the economic imperative trumps the environmental one. The problem for Morrison though it that he is promising something that the current system is ill-equipped to deliver.
If Chinese demand continues to suck increasing amounts of gas into the export terminals, given the lack of capacity in the system, there is nothing Morrison can do to get prices down aside from restricting imports.
But that will have implications for foreign investment. As mentioned, $70 billion went into building the LNG export industry. Most of those funds came from foreign investment.
Investments are made in the expectation of a return. If the government restricts the ability of companies to make a return when prices are high (by curbing export volumes), it raises question marks over our ability to continue attracting foreign investment.
Which is kind of important for Australia. Thanks to a ‘selling of the farm’ policy practised by all sides of politics, we now have a net debt position (A.K.A foreign debt) of more than $1 trillion. And our current account deficit continues to deteriorate. In the June quarter, it hit $13.5 billion.
The consequence of exporting energy
But aren’t commodities booming? What about all the LNG exports, are we making money from that?
Not really. If foreign capital finances the projects, where do the profits go? That’s right, they flow offshore too.
I’ll show you what I mean…
In the June quarter, Australia generated a trade surplus of $2.8 billion (seasonally adjusted). That reflects the straight accounting of selling more goods and services than we receive. That’s great, right?
But the ‘net primary income’ figure is a disaster. It measures the difference between what we earn on our investments overseas and what we pay out to foreigners who have invested in our assets. For example, a large chunk of the profits from the LNG export industry flow offshore.
As I mentioned, our net debt position is over $1 trillion. The interest bill on that doesn’t exactly amount to small change. That’s why in the June quarter, our net primary income deficit was nearly $16 billion. That’s a $64 billion debt servicing bill that flows offshore on an annualised basis.
The commodities boom may have improved our trade deficit, but the net primary income deficit just keeps getting worse. Put the two together and you get the current account deficit. It’s chronic, and in a slowing global economy it will get worse.
That’s why the Aussie dollar has collapsed this year.
In effect, if Australia doesn’t get enough capital flowing in to finance its deficits, the dollar will likely fall to make up the difference. On Friday, the Aussie dollar fell to its lowest level since early 2016, and is just above 71 US cents.
Scott Morrison has inherited an economy with a very fragile foundation. And the way things look, he’s about to pass it on the Bill Shorten…
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Editor, Crisis & Opportunity
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