China gets Australian energy cheaper than Australians

Labor has won a majority to rule Australia for three years. Much of his victory was based on promises to help the cost of living for households.

There are two components to this. First, wages must rise faster than in ten years. The Albanian government seems willing to support stronger wage demands amid a fantastically tight labor market, so that’s a good thing.

The second part is: rising costs for goods and services† Can Prime Minister Anthony Albanian succeed in that area?

There is one point of good news. The global supply chain shock that drove up so much offshore commodity prices has all but disappeared. Ships, ports and trucks are all now flowing as normal and the prospect is for major price drops.

There is also good news in the worldwide production of consumer goods catching up with demand that falls as interest rates are being tightened around the world.

The US, in particular, has huge inventories of goods, so any consumer slowdown in the coming year will lead to global goods deflation.

But that always happened and the Albanian government really only enjoys a windfall.

Energy is the problem

The biggest problem facing the Albanian government is one of its own. It’s the extraordinary energy price shock hammering on the east coast economy.

Since the war in Ukraine, the global oil and gas prices have skyrocketed. We all feel that at the gas pump. What is perhaps less well known to Aussies is that the Australian gas price has followed suit.

Traditional Australian gas prices are $3 gigajoules (Gj). Currently the price is $35Gj. This is exactly the same price Europe pays Russia for its gas, a price gouge used as a weapon of war.

But Europe does not have its own gas and therefore has no choice. Australia has gas. Loads and loads thereof. Much more than we could ever need. It is popping up for $1Gj across QLD and SA.

But what happens to it then is beyond all hope and reason. Three quarters of it is shipped to China as LNG for $31 Gj, $4 Gj cheaper than sold locally.

This is the crazy world of the East Coast gas export cartel that is deliberately starving the local gas market to drive up prices at home, while also forcing prices on China.

To make matters worse, the gas cartel pays no tax for this, and in the final kick for any person east of WA, it drives up electricity prices because gas-fired power plants determine marginal costs in that market too.

To put it bluntly, every Australian east of the WA border is currently being forced to pay a huge and high energy tax that will drive up the cost of absolutely everything. WA is OK because it has a domestic gas reservation policy so the local price is less than $6Gj!

And we’re doing this as a subsidy to the Chinese economy, while that country in return causes all kinds of economic and geopolitical damage to Australia.

Gigantic CO2 tax

There is a very simple solution to this curious form of cost-of-living self-abuse. It is called the Australian Domestic Gas Reservation Mechanism (ADGSM).

Installed by Malcolm Turnbull when the local gas price hit a measly $20Gj in 2017, it’s a contract with the cartel that forces it to leave more gas here so the local price crashes to acceptable prices around $7Gj.

But with this master agreement already in place, the trigger ready to pull, with the cost of living in full swing and severely exacerbated by the energy inflation shock, new Labor treasurer Jim Chalmers has already stated that “electricity prices are the pointed end to the cost of living crisis,” but says he will instead rely on measures to boost renewables to drive prices down.

This will eventually work. But it will take years as everyone’s energy bills spiral, every producer of goods and services east of WA tries to recoup costs with higher retail prices, and the RBA is forced to make things worse with rate hikes.

In fact, Labor is allowing an energy cartel to impose a massive private carbon tax amid a cost-of-living crisis, when the roll-out of renewables does happen.

You might ask your local member why the Albanian government allows this caricature of economic mismanagement.

David Llewellyn-Smith is chief strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding editor and editor of The Global Economy of The Diplomat, the leading portal to geopolitics and economics in Asia. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review. MB Fund is underweight Australian iron ore mines.