Monday, December 19, 2016

Mining makes pollies confused about demand and supply

Since almost all of us have lived in a market economy all our lives, you'd expect the effects of supply and demand on price would be well understood, particularly by anyone who managed to get themselves into Parliament.

In fact, however, our politicians on both sides have terrible trouble working out how supply works. Sometimes they tell us increasing supply will put downward pressure on price and sometimes they tell us it won't.

Turns out they're wrong on both counts.

When it comes to natural gas, Industry Minister Greg Hunt – like his predecessors Ian Macfarlane and Martin Ferguson who, purely by chance, have since gone on to jobs lobbying for the mining and gas industries – tells us the solution to the high price and looming "shortages" is for the Victorian and NSW governments to give gas companies free rein to do their fracking wherever they choose on the states' farmland.

Adding to the eastern states' production of coal seam gas would increase supply and thus put downward pressure on gas prices and avert the risk of shortages, they tell us.

This would be true if Australia – strictly, our eastern seaboard – had a closed market. If there was no international trade in gas.

But that's the trick the pollies and the business interests they want to help don't want to draw attention to.

There's been little change to the eastern states' demand for gas, nor decline in the supply of gas from Australian gasfields.

What's changed is the decision of our governments to allow foreign investors to set up several gas liquefaction plants near Gladstone in Queensland.

By doing so they opened a link between our closed gas market and the world market, where the world price of gas just happens to be a lot higher.

The inevitable result is our wholesale gas price has doubled to reflect the world price, our manufacturers are claiming to be "uncompetitive" at such a price and people are claiming to see shortages looming.

(As is typical in a resources boom, when our politicians see their job as complying with every demand coming from the miners in their greed-driven frenzy, we allowed too many liquefaction plants to be built and now none of them is making money. But that's a separate stuff-up.)

The point is, for as long as our governments allow local gas producers to charge us the world price (which I think they should), no amount of additional coal seam gas production would be sufficient to lower that world price.

Federal pollies of both colours bang on about reducing the restrictions on fracking because they're doing the bidding of their mates/generous party donors/future employers in the gas industry and because they want to draw attention away from the truth that they allowed domestic gas prices to rise and don't want to do anything to cut them.

There'll be no gas shortage as long as we pay the world price.

When it comes to the politicians' enthusiasm for constructing Adani's Carmichael coal mine in the Galilee Basin of central Queensland, however, they leave us with the impression its addition to world coal supply would have no effect on the world coal price (or global carbon emissions, for that matter).

But we're one of the world's biggest exporters of coal. And Carmichael would be one of the world's biggest mines.

So it couldn't help but push down the world price, relative to what it would otherwise be, to the detriment of all our existing coal producers and their employees, and government royalty and company tax collections.

The Queensland government is so keen to see the mine proceed ASAP it's willing to subsidise a rail line to a coastal port by $1 billion. Can you imagine what that would do to its net royalty revenues?

It claims the rail line isn't a subsidy because it's a loan (believe that if you like) and because the line will open up the Galilee Basin to other mines.

Should they emerge, however, the downward pressure on coal prices and tax receipts would be even greater.

All this says Australia has not much to gain and a lot to lose by pressing on with the development of one more coal mine.

At a time when the whole world needs to make the transition from fossil fuel to renewable energy as soon as we reasonably can, pushing down coal prices slows the process down by increasing the relative price disadvantage of renewables.

There seems to be something about political office in Australia that interferes with our pollies' economic reasoning powers. I can't think what it might be.