While
standard theory suggests the Australian LNG boom will be a win for our
economy, the reality suggests the benefits may not be as big – or evenly
shared – as might be hoped
standard theory suggests the Australian LNG boom will be a win for our
economy, the reality suggests the benefits may not be as big – or evenly
shared – as might be hoped
The opening up of the eastern gas market to international markets will cause gas prices to rise .
Photograph: Graeme Robertson/Graeme Robertson
The opening of the eastern gas market to export is set to cause massive ructions to Australia’s economy. But while standard theory would
suggest the LNG boom will be a win for our economy, the reality of poor
taxation policy and a lack of a carbon price suggests the benefits may
not be as big as might be hoped.
For decades now – perhaps ever since Gough Whitlam reduced tariffs
across the board by 25% in July 1973 – free trade has been viewed as an
economic good. The argument has always been that while it may hurt some
businesses, the increased competition produced more efficient and
productive businesses, and also lower prices for consumers.
The opening up of the eastern gas market to international markets
will have a counterintuitive result of causing gas prices to rise due to
increased competition. As I have written recently,
this is because the Japanese market price for LNG at between US$15 and
US$17 per gigajoule (GJ) is well above the $4 per GJ price here in
Australia:
Accounting for freight and conversion to and from LNG would mean the
domestic gas price will rise to around $9 per GJ once LNG begins being
exported via Gladstone to Japan and the rest of Asia. This means high
gas using households in Victoria for example could see their gas bill
increase by over $400 a year.
Despite this massive increase in gas prices, free trade proponents
argue the government should resist altering the gas market either by
imposing export restrictions of a reserve price for domestic gas.
This week the Grattan Institute, which has published a number of papers on the changing gas market, released another report
arguing that the economic benefits from unfettered export of LNG
massively outweigh the cost of higher gas prices for domestic users.
Its report, “Gas at the crossroads: Australia’s hard choices” is
aimed squarely at the federal and state governments, arguing that “the
emerging export industry will deliver overwhelmingly positive economic
benefits for Australia”. It suggests that governments should “resist”
the pressures from unions and business groups to “protect Australian
industry and consumers from the price rises”.
But while the report perhaps passes muster according to the economic
textbook, the caveats within the report may cause us to wonder whether
we in the real world will receive such benefit.
First is the profitability of the industry itself. The LNG market is closely tied to the oil price. A recent report from Bloomberg suggests that the recent slump in oil prices could be a “disaster” for some LNG projects.
In the past couple of months world oil prices have slumped due to the
US increasing production and a general lack of demand due to the weak
European and less than stellar US and Chinese economies. Since June the
price for Brent Crude, which is the world benchmark for oil, has fallen by over 23% from US$111 a barrel to around US$85 a barrel:
Although Origin Energy has told its shareholder that it needs a
price of $55 a barrel to make a profit, some analysts suggests anything
under $80 a barrel starts making the profit margins tight on new LNG
projects.
The connection with oil prices is also a factor in the benefits an LNG export boom might bring the rest of the economy.
While certainly a large increase in LNG exports would see companies’
profits increase, the industry itself is not expected to be a major
driver of employment.
In March, The Australia Institute
reported that “the entire oil and gas industry employed just 20,700
people”. It put that figure into context by noting “hardware retail
company Bunnings employs 33,000 people”.
Moreover, the Grattan Institute report cites a study by Deloitte
Economics that found an increase in gas prices could cost “more than
14,500 full time equivalent jobs” in manufacturing and other industries
by 2021.
So while gas company shareholders will be happy, there is doubt that
this boom will lead to more jobs elsewhere and crucially, even more
doubt it will lead to an increase in government revenue.
And this is a crux of the Grattan Institute’s assertion about the
benefits. It notes that “the argument that Australians have more to gain
from trading LNG than they have to lose from higher prices assumes that
appropriate tax and transfer systems are in place”.
However, one problem is that the mechanisms for companies being liable for the Petroleum Resource Rent Tax (PRRT), which includes coal seam gas, is linked to the oil price. In 2012 some gas companies suggested the oil price would need to be $150 a barrel before they would be liable to pay the PRRT on the new gas projects.
Certainly the May budget did not anticipate any major boom in PRRT revenue:
The Grattan Institute paper argues “governments need to ensure that
the public really does benefit by levying the appropriate taxes and
royalties on LNG exports”. That’s a nice view, but given the current
governments view toward mining taxes, it is little more than a gas pipe
dream.
The paper is also rather blithe on the environmental impacts.
It finds that if “half of the electricity produced from gas in
2012-13 had been produced from coal, Australia’s emissions would have
been more than 15 million tonnes higher”. It notes that as a general
rule gas is more expensive than coal to produce electricity, and that if
gas wholesale prices were to rise it is likely that coal powered
electricity would become more common.
But the report also notes that “with a carbon price of $30 a tonne of
CO2 or higher, existing gas plants would be more competitive than
existing coal plants. But if gas prices increase by $5 a gigajoule, gas
would not be favoured over coal, unless the carbon emissions price were
$70 a tonne or more, an implausible figure at present”.
Small problem though: we don’t have a carbon price anymore.
And the gas industry as you would expect is only interested in
reduced emissions if it occurs through gas production. The peak lobby
group for electricity transmission and gas distribution, Energy Networks Australia has recently been arguing against subsidies for solar panels, suggesting that the solar industry is big enough to “stand on its own feet”.
But as the Grattan Institute report states, the gas industry itself
has been a large benefactor of government subsidy such as the $100
million “Energy for the Regions program” which subsidised the expansion
of gas networks to parts of regional Victoria.
There certainly are benefits to the nation from the expanding LNG
industry but if, as the Grattan Institute concludes, “all Australians
have the right to share in the bounty of our natural resources”, a lot
more needs to be done.
Without a taxation regime that ensures the benefits of the LNG can be
shared – and also used to alleviate the cost to households – and
without a price on carbon, it is doubtful the benefits of an LNG boom
are going to flow through as well as the free market theory would have
us believe.
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