Real energy problem is our secret gas parity-pricing policy

Malcolm Turnbull wants us to believe he's an energy magician, able to pull off a "policy trifecta" of eliminating blackouts and greatly reducing our emissions, all without much increase in the price of electricity and gas.

The main trick magicians use is to direct the audience's attention away from the place where they're doing their sleight-of-hand. That's what Turnbull's up to.

He wants to shift the blame for blackouts away from the feds and onto the states, while doing exactly the same for the big jump in gas prices.

He wants to blame our problems on a too-fast shift to renewables, to justify a new subsidy for new coal-fired power stations.

But the main thing he – and the gas industry – desperately wants to stop us noticing is that the leap in gas prices is a consequence of long-standing federal government policy and has nothing to do with the states' reluctance to let the gas producers frack all over their farmlands.

The balance of supply and demand for natural gas on our eastern seaboard was fine – and would still be today, were it not for the feds' earlier decision to allow foreign investors to build (too many) liquefaction plants near Gladstone in Queensland.

As the feds understood full well, once you can liquefy natural gas you can ship it overseas. And once you do that you've taken the relatively tiny, closed eastern Australian gas market and opened it up to the huge East Asian gas market, where prices are much higher.

The inevitable consequence was a leap in the price of gas on the eastern seaboard – plus a huge windfall gain to our eastern gas producers.

Now do you see why the gas industry and federal politicians of both stripes keep repeating the economic lie that the problem has been caused by the states' bans on fracking, and could be solved by lifting them?

No amount of increased gas supply on our part would be sufficient to lower the East Asian price of gas, which means no new producer of coal seam gas would be prepared to sell it to local consumers and manufacturers for anything less than they could get by selling it to Japan or China.

Unless, of course, the federal government obliged them to.

I don't object to the policy of export-parity pricing but, like its predecessors, the Turnbull government wants to keep the policy a deep, dark secret because it's so much harder to defend a super-rational policy in these days of populist indulgence than it was when Malcolm Fraser did something similar to petrol prices.

Turnbull wants to keep the super-rational policy, but shift the blame for its economic and political consequences to others.

Had he the courage, he could oblige the gas industry to use its windfall profits to compensate the household and business losers for losses arising from an implicit government policy change.

Turnbull blames South Australia's blackouts on its excessive enthusiasm for renewable energy which, pending the development of storage arrangements, has a problem with intermittent production.

He doesn't admit his parity-pricing policy is contributing. It was expected that gas-fired power generation would ease the transition from coal-fired to renewable generation.

That's because gas-fired power stations emit far less carbon dioxide and can be turned on and off as required to counter renewable energy's intermittency.

Guess what? South Australia has a new and big gas-fired generator at Pelican Point, near Adelaide, but it's been mothballed.

Why? Because the operator had a long-term contract for the supply of gas at a price set at the pre-export-parity level, and decided it was more lucrative to sell the gas into the East Asian market.

Last week Turnbull had the effrontery to argue that now gas-fired power had become uneconomic, we needed to fill the gap by subsidising new-generation "clean" coal-fired power stations.

Small problem. They're hugely expensive, only a bit less emissions-intensive than existing coal-fired stations, can't easily be turned on and off, and would supposedly still be operating 60 years later.

If there's a case for subsidising any fossil fuel-powered generators the obvious candidate is the gas-fired plants the feds' export-parity pricing policy has rendered uneconomic.

So great is the coal industry's hold over the Coalition that, not content with subsidising increased supply of coal from Adani and others at a time when coal is a sunset industry, Turnbull is now making up excuses to subsidise increased demand for coal by local electricity producers.

Economists are always telling politicians not to try picking industry winners. In reality, the politicians are far more inclined to back known losers.

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Let's do our sums on mining's economic contribution

With Malcolm Turnbull desperate to keep burning coal for electricity, just how important is the mining industry to our economy? Short answer: not nearly as much as it wants us to believe, and has conned our politicians into believing.

Because people like me have spent so much time over the past decade and more banging on about the resources boom, we've probably left many people with an exaggerated impression of the sector's importance.

It's true that, thanks to a quadrupling in the value of its physical capital, mining now accounts for about 7 per cent of our total production of goods and services (gross domestic product), compared with less than 5 per cent in 2004, at the start of the boom.

But 7 per cent ain't all that much, and if you measure mining by how much of our workforce it employs, it's even less: 2 per cent.

That's just 230,000 people, about as many as are employed in the arts and recreation.

It compares with 300,000 workers in agriculture, 400,000 in financial services, 800,000 in accommodation and food services, 900,000 in manufacturing, almost a million in education, a million in construction, another million in professional services, 1.2 million in retailing and 1.5 million in healthcare.

Still think the economy revolves around mining?

How can an industry account for 7 per cent of our production but only 2 per cent of our jobs? Because it's so "capital intensive" - it uses a lot of expensive equipment, but not many humans.

Because it employs so few people directly, the industry is always paying "independent" economic consultants to estimate how many people it employs "indirectly" as dollars earned from mining are spent in other parts of the economy.

This is always a good way to impress judges - who know a lot about law, but little about economics - when you're trying to persuade them to let you despoil the environment.

It's true that money earned from mining has a "multiplier effect" when spent. But it's just as true of money earned from any other industry. Or money spent by the government.

Normally I'd be happy to defend an industry against the idea that it didn't contribute much because its capital intensity meant it directly employed few workers.

That's because what matters most is how much income the industry earns from its production. When that income is spent - by employees, suppliers, tax-receiving governments or profit-earning shareholders - jobs will be created somewhere in the economy.

In the case of mining, however, there's weakness in the argument. Our mining industry is about 80 per cent foreign-owned - mainly by BHP Billiton, Rio Tinto and Glencore - which, in econospeak, adds a huge "leakage" to the "circular flow of income" around our economy.

(Another leakage is that most of the heavy equipment the miners and natural gas producers use is imported.)

If most of the profits made by our (highly profitable) mining industry don't belong to us and end up being spent in some other economy, this greatly reduces the economic benefit we get.

Which makes it doubly important the mining companies are paying a fair rate of tax on their earnings in Oz.

Here, the industry often pays "independent" economic consultants to write reports showing what huge amounts of tax it pays.

But these usually rely on the legal fiction that the minerals royalties the miners pay to state governments are a tax. In economics, a tax is something you pay the government for nothing specific in return (if you are paying for something specific, it's a "user charge").

Royalties are a user charge. The miners are buying access to valuable mineral deposits owned by us. Royalties are levied on different bases but, overall, they're probably charging less than the minerals are worth.

So the miners shouldn't expect brownie points for paying for the minerals we hand over to them. The Rudd government did try to ensure we taxed their profits more fairly and adequately but, as you recall, the miners objected and so Tony Abbott abolished what was left of the tax.

But, whatever their profits, they're paying 30 per cent of them in company tax, right? Right in theory but, as we've realised, in practice not so much.

Our big foreign mining companies are heavily into minimising the tax they pay by moving profits offshore, claiming to do their "marketing" in Singapore, where the tax rate is lower.

All of which makes you wonder how well we do from our foreign-dominated mining industry, considering all the environmental and economic disruption we have to put up with.

But it's worse than that. Our politicians, state and federal, are so desperate to create the temporary appearance of progress and jobs that mining projects bring - and, no doubt, to say thanks for the generous political donations the miners make - that they often use the offer of hefty subsidies to attract them.

The subsidy comes in the form of governments building railways, ports and other infrastructure on the miners' behalf. (Not to mention the federal government's exemption of mining from paying the diesel fuel excise, worth billions a year.)

Take the Indian Adani company's proposed Carmichael coal mine in central Queensland, which is so huge it would lower the world price of coal, to the disadvantage all existing Australian coal miners.

Queensland's Newman government was so keen to use the project as proof of progress it offered Adani a "royalty holiday". Now the Turnbull government is offering a $1 billion-plus concessional loan in the name of developing Northern Australia.

Both the miners and the politicians indignantly deny the industry receives any subsidies. But that's not what the West Australian and Queensland treasuries say in their submissions to the Commonwealth Grants Commission, revealing how poor the mining companies keep them.

If the nation is ahead on the mining deal, it ain't by a lot.

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