Paying the price
labor should be addressing supply issues rather than imposing artificial caps on gas prices that will only bring more pain for investors and consumers in the long term. By angus taylor.
Affordable, reliable energy is essential for Australian households, businesses and industry but defying the laws of supply and demand will always end badly.
Labor’s diabolical energy initiatives ignore Economics 101 with an appalling policy that will end in tears.
The 4000-word consultation paper released just days before the legislation is due to be voted on in parliament fails to explain how its proposed “solution” will deliver on its goals.
It gives the government unprecedented powers to control the Australian energy sector.
It delegates power to the treasurer to make broad-ranging regulations to control pricing, contracting and purchasing activities in the gas market.
It creates a permanent cap on rates of return – something that even the worst tin-pot autocrats haven’t imposed on their upstream resources sectors for fear of strangling investment and supply.
This model is “adapted” from the infrastructure sector, but that sector has regulated returns on investment, not caps on returns.
Worse, powerlines and railways are fundamentally different from the high-risk entrepreneurial activities of geologists, explorers and resource project developers focused on proving up and developing valuable scarce reserves. These upstream resource investments have a long successful history in Australia but are badly misunderstood by the government and are likely to collapse under this regime.
Energy analysts have labelled Labor’s policy as the near nationalisation of the energy sector and “the single worst piece of energy policy” seen anywhere in the last two decades.
Beach Energy chief executive Morne Engelbrecht said, “This unprecedented move … will damage the investment environment in Australia, leading to more gas shortages and higher power prices …”
With ageing and fast-depleting wells in Gippsland and the Bass Strait alongside restrictions or bans on new supply across south-east Australia, the prospects for large shortfalls are real and pressing.
Distorted price relativities for gas versus other fuels will only exacerbate this by stimulating demand.
Shortages would lead to gas rationing or sharp price increases in consumer markets exempt from the price caps under this legislation.
Of course, those who fail to learn from history are doomed to repeat it. When we faced sharp increases in inflation in the 1970s, price controls were a disaster.
In 1973, US president Richard Nixon’s infamous 90-day freeze on all prices and wages across America was a lesson in how not to fight inflation.
It was a radical price control policy that gave the government complete power over America’s economy, exacerbating years of stagflation and plunging the US into a painful recession with millions of everyday Americans paying the price.
Gough Whitlam sought to go down the same path in Australia, failing in a referendum in 1973 and then failing as a government soon after.
Labor’s plan risks history repeating itself with Australian households and businesses paying the price.
Just as the October budget failed to treat the inflation problem at its source, Labor’s proposed energy legislation is only treating the symptoms.
The cure for both the short term and the longer term is to boost local supply, working within the laws of economics and not against them.
That means offering incentives to the gas companies to divert more gas into the domestic network right now.
It means getting more gas out of the ground through projects like Narrabri and the Beetaloo Basin while supporting the industry’s decarbonisation initiatives.
This worked for the Coalition, and it can work again.
In 2016, prices spiked to more than $20 a gigajoule – not dissimilar to the prices experienced today.
Sensible policy interventions, hard negotiations and continual consultation led to prices falling to just above $5 a gigajoule.
Manufacturers and consumers were the winners and one of our biggest export sectors prospered. Our commodity exporters underpinned our relative economic strength during the pandemic (and the global financial crisis), and this year alone, big gas exporters delivered almost $1400 in tax revenue per household that would otherwise have to be found elsewhere.
Before the election, the Coalition supported the acceleration of seven critical gas projects focused on more supply into key markets but Labor wound this back in its October budget.
The reality is this government does not like natural gas.
One of the current energy minister’s first acts in the portfolio was to call investment in gas supply “BS”. A year later and now in office, Labor has abandoned gas infrastructure projects, excluded gas from its half-baked electricity capacity market and is undermining new investment.
After promising not to waste a day in office, the government has floated thought bubbles almost daily while waiting until the eleventh hour to reveal a bill that is rushed and poorly thought through with no genuine consultation.
The Coalition wants to see lower energy prices, but this ill-considered intervention will undermine our hard-fought position and reputation as one of the world’s great resource and commodity suppliers, while failing to deliver Australians what they were promised.
Angus Taylor is shadow treasurer. This article first appeared in The Australian Financial Review.