Tuesday, January 20, 2015

Local gas prices set to soar as exports to Asia get under way

While most of us were on holidays, something happened off the coast of Gladstone in Queensland that will have hip-pocket implications for consumers across the eastern states.

In late December, British energy giant BG Group sent the first ever shipment of liquefied natural gas from Australia's east coast, using gas from the state's booming coal seam gas industry.

Granted, it sounds far removed from everyday life for most of us. But this cargo load is the start of a trend that will dramatically increase how much households pay for gas used for hot water, cooking, or heating.

It is predicted to push up many households' utility bills by a similar amount to the carbon tax, but there are no plans for compensation. And as you'd expect with a jump in the cost of living of this size, this one is producing some seriously flimsy economics.

First though, back to that shipment. Not only was it the first time that CSG has been converted into LNG, the exportable form of gas. More importantly for consumers, it was the first time gas has been exported from the east coast of Australia at all, and there is much more to come.

Origin Energy and Santos this year also hope to start pumping cargo loads full of the stuff, to be sold to buyers across China, Japan, Korea, Malaysia and other Asian nations.

Economists are keeping an eye on these projects – and others in WA – as there are predictions they could make Australia the world's biggest exporter of LNG by 2018, overtaking Qatar. LNG looks set to become our second biggest export behind iron ore.

But what will affect households directly is how this massive new industry transforms the domestic gas market.

Now that the east coast is able to export gas (WA has been doing it since 1989) producers have the option of selling to buyers in Asia, who are willing to pay much, much more for it than we have been.

Historically, the east coast gas market was insulated from the rest of the world, and the domestic wholesale price was stable at about $3 to $4 a gigajoule. Now, there are buyers across Asia prepared to pay $12 or $13, even when energy markets are in turmoil as they are at the moment.

That translates to much higher domestic prices. When you account for the costs of converting the gas into LNG and shipping, it still suggests a domestic gas price of $6 to $8 in the wholesale market. That is, a 100 per cent increase from the long-term average.

So far, the NSW regulator has approved a 17.8 per cent rise in retail gas prices between 2014 and 2016, partly in response to the new export boom.  Victorians face a similar jump over the next few years because its producers can also sell their gas to the north.

And these increases are just the beginning, with further significant price rises expected for the next few years.

As this extra cost is passed on to users, it will push up utility bills significantly. A report by the Grattan Institute's Tony Wood last year estimated the average Melbourne household gas bill would jump $300 a year because of the changes over the next few years, while the average Sydney bill would rise by more than $100.

That compares with the extra $270 a year that Treasury estimated we'd be spending on gas and electricity because of the carbon price.

Cost increases like this are understandably causing plenty of concerns for the more vulnerable consumers and affected businesses. Governments in NSW and Victoria are investigating the issue now.

And it is in this heated environment that business groups are mounting a campaign based on flawed economics.

In submissions to a NSW parliamentary inquiry, industry groups and AGL have repeatedly claimed that increasing the supply of gas in NSW would be one way to limit the impact of the gas price shock.

More specifically, they argue, the government should stop getting in the way of the industry's plans to dramatically expand the extraction of coal seam gas, despite all the environmental and community concerns.

It's economics 101, right? Lifting supply should push down the price. Except in this case, the claim is a furphy.

As the Independent Pricing and Regulatory Tribunal (IPART) says in its submission, the amount of coal seam gas being extracted in NSW has a minimal impact on what the state's residents pay for gas. That price is now being set in the international market.

"As domestic gas prices are set largely by international gas prices, the development of coal seam gas reserves in NSW would impact domestic gas prices to the extent it impacts the international market," IPART says.

When you consider that NSW's gas reserves only meet 5 per cent of its own needs, the state's industry is clearly nowhere near the scale to affect global prices in any plausible scenario. To imply that it could is misleading.

The bottom line is that gas prices are set to soar because the long-sheltered domestic market is being linked to global prices via exports.

When utility bills are already such a sensitive issue, the industry does itself no favours making self-serving and misleading claims about how to these price pressures might be curbed.


PNG government speaks out on claims of violence at Manus Island detention centre

The Papua New Guinea government have denied that local police stormed the Manus Island detention centre as the number of asylum seekers staging a hunger strike grows and water has been reportedly cut off in parts of the facility.

Two-thirds of the population of the Manus Island centre are now refusing food as detainees grow increasingly desperate to avoid the Australian government's plan to resettle them in PNG, which is expected to begin this week.

Refugee advocates say that the water in the Delta compound has now been completely cut off, forcing asylum seekers to drink from drains. It is believed a number of asylum seekers have barricaded themselves inside their compounds as part of the protest.

On Monday morning, PNG's Immigration Minister, Rimbink Pato, confirmed that protesting asylum seekers on the island had sewn their lips together, swallowed razor blades and had also started swallowing washing powder.

But Mr Pato said reports that the local police had entered the facility at the weekend were false.

"Despite claims by agitator groups in Australia, at no time have police been called upon to enter the facility," the minister said in a statement.

"Each case of self-harm is being investigated by medical personnel and appropriate action is being offered to the individuals concerned."

Refugee advocates claimed that PNG police had entered the centre in riot gear over the weekend, but Fairfax Media understands it was the emergency response team from Wilson security.

Fairfax Media has also confirmed a number of protesting asylum seekers were taken to the Chauka compound over the weekend, which is a smaller compound used to discipline asylum seekers acting aggressively.

In a letter obtained by Fairfax Media, asylum seekers from the Foxtrot compound wrote to Federal Immigration Minister Peter Dutton saying: "If you do not wish us to come to Australia, then that's ok. It's your country. But it does not mean you have the right to settle us in PNG."

Many of them have been imprisoned in the centre for more than 18 months, the letter said.

"We are not toys for you to play with and not animals to imprison us here. "If you send us back to where you found us, it is better for us to live with sharks and sea whales than to stay one more day with inhumane people.  "We can say that when we woke up today, we are resolved to die here in order to bring back our dignity and our freedom."

The Immigration Department and Mr Dutton's office have been contacted for comment.

On Saturday, Mr Dutton said the escalating hunger strike would not change the government's resolve to resettle the men found to be refugees in the PNG community. He also denied security guards had "violently engaged" with the asylum seekers at the weekend.

"I reiterate that while people have the right to protest peacefully, the government will not waver on its successful border protection policies which have saved lives and restored integrity to our humanitarian programme," Mr Dutton said.


Free speech and the aftermath of Charlie Hebdo

The debate about reform of Section 18C of the Racial Discrimination Act has bubbled up again in the wake of the slaughter at the Charlie Hebdo office, and has been met with predictable outrage over political point-scoring from opponents of reform who argue debate should not be re-opened.

For what it's worth, I agree. The debate should have never been closed in the first place.

It is a strange defence of freedom of expression that simultaneously condemns the killing of people for drawing cartoons and implicitly affirms that Australian law should nevertheless have a chilling effect on those who might produce similar words or images.

Implicit in the exhortation to restrict speech are the ideas that free speech is a zero-sum game where the 'loser' is almost always a minority community; that minorities gain little from freedom of expression and that they do not lose much from restrictions on speech.

The reality is that, across the globe, people fight for liberal democratic ideals and for free speech in particular. Just this week, Saudi Arabian blogger Raif Badawi was sentenced to 1000 lashes for calling himself a liberal. Anti-blasphemy laws - part of India's strange tradition of secularism - undermine free speech in that country in the name of unity. Free speech is no less important in the Western world, and the same conviction that defends it abroad should defend it here.

Minorities of all stripes - Muslims included - can and do defend the liberal democratic values that underpin our society, and this includes the right to free expression. The solidarity expressed in #JeSuisCharlie was complemented by #JeSuisAhmed, in honour of the French Muslim police officer Ahmed Merabet who was gunned down outside the Charlie Hebdo office. The Muslim mayor of Rotterdam, Ahmed Aboutaleb, alsoused rather colourful language when defending the centrality of a free press to Dutch society.

While it's obvious that some speech does offend and hurt particular minority communities, it does not follow that restrictions on speech are therefore necessary. Free speech is just as important to minority communities as it is to society as a whole. British author Kenan Malik argued in the wake of the Charlie Hebdo massacre that "once we give up on the right to offend in the name of 'tolerance' or 'respect', we constrain our ability to challenge those in power, and therefore to challenge injustice". It is patronising to suggest otherwise.

Jonathan Rauch wrote "the open society is sometimes a cross we bear, but it is also a sword we wield, and we are defenceless without it". He was writing specifically about one particular minority community, but it's a lesson we could all bear to learn.


The silly season GST debate

A public debate about the Goods and Services Tax (GST) is something we have to have, but considering some of the recent contributions, the silly season wasn't a good time to start it. Consider the following examples.

The 10% GST rate has been described as merely an 'introductory' rate (like a teaser home loan interest rate) which was never meant to remain. That would be news to a lot of people.

Related to that is the notion that Australia's rate is well below the OECD average (19%), and therefore there is plenty of scope to increase it.  The OECD countries that have such high GST (VAT) rates also have much higher levels of government spending and overall tax burdens. It is not obvious why we should follow their tax policy examples, considering the economic strife many of them are in.

Much of the commentary has focused on broadening the GST to cover items such as uncooked food. One claim was that the Abbott government already has a mandate to broaden the coverage because the Howard government won the 1998 election proposing to include all food in the GST base! Whatever there is to the mandate theory, it doesn't stretch back 16 years and six elections.

Another suggestion is that the GST should be broadened to cover private school fees and health insurance premiums because these are mainly paid by rich households.  This would make the GST more selective and distorting, not less. If the tax is to be extended to education and health (a contentious issue that raises more complexities than food), it should be to all education and health services, not just ones picked out for 'tax the rich' reasons.

If the GST is ever increased or broadened, it is likely to lead to a higher overall tax burden. A trade-off between (say) a broader GST at a 15% rate and a top income tax rate of (say) 33% as in New Zealand is nice to contemplate but unlikely to be achieved.


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