Two weeks ago, at the request of Treasurer Scott Morrison, the ACCC (Australian Competition and Consumer Commission) released an interim report into the current conditions of Australia’s wholesale gas market, and it doesn’t look pretty. According to the report, Australia’s east-coast is facing a catastrophic supply shortfall of “up to 55 petajoules in 2018 which could be as high as 108 petajoules if domestic demand is higher than expected,” said ACCC chairman Rod Sims.
To put this into perspective, just one petajoule is enough gas to supply the residential needs of Warnambool, Wollongong or Penrith, or a large industrial user. Most affected industries include the milk, metal, paper and vehicle industries for which gas is an irreplaceable source of energy.
“The effect of high gas prices is felt right across the economy, from households to big business,” said Mr Sims. “Over a third of the commercial industries we interviewed are considering production or closure due to high gas prices.”
If Victorians cast their minds back 20-odd years to the Esso Longford gas plant explosion in 1998, in which two workers were killed and several more were injured, they might know what to expect. For up to three weeks, Victorian households endured the stark reality of their gas dependence. A state wide spike in purchases of camper showers, electric stove tops and heaters ensued, doing duty for their gas equivalents while electricity prices soared through the roof. And though these immediate impacts might seem petty, the indirect economic consequences were catastrophic, with industry in the Garden State remaining at a standstill until the crisis was resolved.
Unlike in 1998, however, gas will be available to every household and business, only at three times its current price. And instead of lasting for the best part of a month, this projected shortfall may last for up to three years, according to the ACCC report, if neither gas producers nor the government can remedy the shortfall.
So, if New South Wales and Victoria’s numerous gas plants aren’t blowing to pieces and are in fact still producing, where is it all the gas going?
According to the Reserve Bank, east Asian spot markets in Japan, South Korea and China where prices are only at a fraction of what Australian households and businesses are now paying. Oh, the irony! It was a little more than a year ago that energy minister Josh Frydenberg had been boasting of LNG (liquified natural gas) exports. “We are now verging on becoming the world’s largest LNG exporter,” he proclaimed in June last year. “Importantly, our LNG export capacity will continue to ramp up.” Words that Minister Frydenberg may now regret. And of course, he threw in some political point scoring to boot:
“I call on the Labor Party to reconsider its attack on the successful policies that have attracted over $400 billion in investment into Australia’s resources and energy industry, which has helped make Australia the largest exporter of LNG in the world by 2019-2020.”
What was Labor’s attack? A proposal for a domestic gas reservation which, according to Minister Frydenberg, would “kill investment, destroy jobs and ultimately lead to less gas supply.” How the tables have since turned. While Australian homes and businesses await next year’s crisis, Malcolm Turnbull has, on no more than five occasions in six months, made a point of assuring the public that the government has everything under control.
In mid-March, the Prime Minister issued a stern warning to gas exporters that the Commonwealth has “tremendous powers” including “the ability to control exports” which would be used if they wouldn’t take it upon themselves to provide a sufficient supply of gas for domestic consumers. And then in April, after garnering an unsatisfactory response, he announced an “Australian domestic gas security mechanism.”
Perhaps he stuttered because later, in June, Prime Minister Turnbull was again compelled to warn that he had “finalised tough new regulations in the gas sector.” But it was only after the ACCC released its interim report in September when the government seemed poised to finally “pull the trigger” on a domestic gas reserve. Then Malcolm issued… another warning!
Two days on, we were given some reprieve from the policy bewilderment. With the full authority of his office, the Prime Minister took to the lectern and with great gusto, proudly informed the restless press gallery that there was no need to impose a reservation on gas after all. Gas exporters “have given us a guarantee that they will offer to the domestic market the gas that was identified as the expected demand shortfall…in 2018.”
Strangely enough, on March 15, he announced a similar guarantee as cause for celebration. “[East coast gas suppliers] have given us a commitment…that gas will be available to meet peak demand periods in the national electricity market.”
If there was any hope that the Prime Minister’s dull warnings had actually coerced gas market operators into remedying Australia’s east coast dilemma, then hope again. “While the LNG projects have taken some steps to supply more gas into the domestic market, it is unclear to the ACCC why we are not seeing more of it and why such significant volumes of LNG are forecast to be sold on the international LNG spot markets in 2018,” said the ACCC’s interim report which proposed its own, familiar prescription. “The expected shortfall could be reduced to a significant extent if the expected sales on international… markets were instead redirected to the domestic market.”
For decades, Liberal governments have insisted that we put the economy in neutral and let it roll idly into a mythical land of prosperity. But these days our Liberal government is more difficult to keep up with. Their presumptive economics have led Australia’s gas market into a state of crisis which is, in the words of the Prime Minister, “utterly untenable.” In the face of market failure, will he continue to toe the party line? Or will he outrage his free-market forbears and take the wheel before it’s too late?