Archive for the ‘LNG’ Category
more on gas prices in Australia, sort of
Coal, oil and gas are called fossil fuels, because they are mostly made of the fossil remains of beings from long ago. The chemical energy within them is a kind of stored sunlight originally accumulated by ancient plants. Our civilization runs by burning the remains of humble creatures who inhabited the Earth hundreds of millions of years before the first humans came on the scene. Like some ghastly cannibal cult, we subsist on the dead bodies of our ancestors and distant relatives.
Carl Sagan
Canto: So during an English conversation group that I’m for the moment in charge of, at our local community centre, we got onto the topic of how Australia finances itself, trade and business-wise. I made the claim that manufacturing in Australia has largely died (based on the fact that I’ve worked in or for six factories in my youth and not-so-youth, – Simpson-Pope, ATCO Structures, Wilkins Servis, Tubemakers of Australia, Ellis Wireworks and Griffin Press – none of which still exist, at least not in the same locations). I also said that our economy is now based largely on the exporting of coal, gas and other mineral resources. As always, I wasn’t sure if I was talking out of my arse, so it’s time for research… But not just about that. I went on to say, apropos of our plentiful gas resources, that we export most of the gas, which is why we pay such a high price for gas domestically. This led a Chinese member of the group to ask – how come? According to him, gas, and energy bills generally, come to much less in China than they do here. So what gives? That’s what we’re going to take a look at today.
Jacinta: Yes we’ve written about this before, in November last year, but I’m happy to revisit the issue, perhaps more thoroughly.
Canto: Well, since that piece was written, there’s been little in the news about the issue, it seems. Except that, in December:
… the Australian government passed a law imposing a price cap on domestic natural gas for 12 months, with the possibility of the cap becoming permanent after that.
Which I suppose is quite important, though it was capped at a high price, presumably compared to Chinese domestic prices.
Jacinta: Well you’ve just quoted from a piece by a writer from the Baker Institute for Public Policy, based at Rice University, a private research institute based in Houston, Texas. Rather surprising to see such a piece dealing with the Australian domestic market, from the other side of the world, so to speak. And it goes into great detail about the economics of price capping, which the author, Kelly Neill, describes as ‘poor policy’, at least in this instance.
Canto: Could they have an ideological bent? What about the poor consumer? I mean the consumer who is poor.
Jacinta: I’ve just read Neill’s bio, and she’s based in Australia:
… at the University of Sydney School of Economics. Her research has focused on competition in natural gas markets, particularly in Australia. She has studied how electricity and gas markets interact, vertical integration of gas retailing and shipping, and the consequences of restricting exports of liquefied natural gas. She is also interested in electricity reliability.
Canto: Sounds impressive. In fact I feel quite intimidated now. I mean, ‘vertical integration of gas retailing and shipping’ – what could that possibly mean?
Jacinta: It’s the opposite of horizontal integration, obviously. Pay attention mate. Seriously, it’s ‘the combination in one firm of two or more stages of production normally operated by separate firms’. Presumably gas retailing and shipping in this case. And Neill’s argument is complex, it seems – it’s a long article, and its complexity is beyond our pay grade (which is zero of course). It’s the kind of economics article that’s designed to be read by other economists, and, after a quick run-through, I see little or no mention of windfall profits by gas companies, the cost to residential consumers, or renewable energy. It does discuss future investment, and she certainly appears to believe that increased development of our gas resources is a very good thing, as if she’s never heard of ‘the Big Switch’ to electricity developed from renewables.
Canto: Yes it’s odd – we’ve mentioned how Chinese newcomers to Australia are wondering why domestic energy costs are so much higher here than in China. Neill focusses, though, on the big consumers:
the intention of the natural gas price cap is to provide relief to industrial gas users
That was news to me – I thought the government wanted to provide relief to impoverished types like you and me. But perhaps they want both. And she also expresses concern that caps will reduce the incentive to produce more fossil fuels. So she certainly has a business as usual attitude to such production, while I’m trying my darnedest to get our Housing Association to put solar panels on our roofs, and to get our gas cooker and hot water system switched to electric. And, as a consumer of science mags and podcasts, all I hear from them is how we must wean ourselves from gas, oil and coal. It seems that economists think differently.
Jacinta: She also writes things that slightly surprise me:
Australians own the country’s natural resources (through their governments), and as such are entitled to benefit from their extraction.
Which sounds good, but I thought these natural resources were owned by the companies that extracted them, via mining and such. Sort of like manufacturing. General Motors makes money from cars, BP makes money from oil. And sometimes these companies receive subsidies from government, to help maintain them, because they’re good for the economy, not only because they provide relatively cheap cars, or oil, for the country, but because that business gets to export the surplus (helped in some way by government) in exchange for goods that we need but can’t easily supply ourselves.
Canto: Yeah we’re not really very good at understanding this are we? I suppose the globalisation of the economy is why we don’t do manufacturing any more. The labour costs too much? Better to use cheap overseas labour and then import? And ratchet up the gig economy so that everybody has just enough work to not count in the unemployment stats? I’m sure the coffee and croissants market is booming. But getting back to gas, my understanding is that coal is rated the worst of the fossil fuels – not only for carbon emissions but most dangerous working conditions. And then it’s oil and then gas. So maybe Neill is right to discount the negatives, at least for the foreseeable.
Jacinta: According to the IPCC, in 2018, 89% of global CO2 emissions came from ‘fossil fuels and industry’, which is kinda vague, tacking on ‘industry’ like that. I mean, can transportation be counted as industry? And according to ClientEarth, natural gas accounts for a fifth of the world’s carbon emissions. By no means insignificant.
Canto: But I’m interested in learning a bit about economic-speak, inter alia, through analysing Neill’s essay. And after all that, we’ll try to find out why Chinese people are paying less for their domestic energy than we are. So here’s a quote from early in the essay which seems to sum up her position:
Forcing companies to sell on the domestic market at a lower price reduces the value of Australia’s gas resources — an opportunity cost that ultimately does more harm than good. Instead, it would be better to maximize the value of the resource and then choose a tax policy that does not affect investment.
The term ‘opportunity cost’ is economics jargon, meaning ‘the loss of other alternatives when one alternative is chosen’, but this idea of maximising the value of the resource would surely be music to the ears of the multi-millionaire gas company owners. And clearly she’s in favour of investing in gas. If I found out that my super fund had been investing in gas I’d be effing furious.
Jacinta: I’m sure they are – it’s a transitional fuel dontcha know. And there’s no doubt that Neill is in favour of our exploiting this resource. Look at this key paragraph:
The influence of the export price in the domestic market has increased over time as gas supply in southern states has declined. State governments in New South Wales, Victoria and South Australia share responsibility for this, with bans on new developments contributing to the decline in gas production. If produced, southern gas could be sold at a discount to the LNG export price, because southern gas would be further from the export plants and closer to demand centers. Indeed, if gas supply was large enough that LNG export plants were at capacity, the domestic price would again de-couple from the export price.
As a South Australian, taking pride in our leading the country in renewables, I’m somewhat nonplussed/gobsmacked at this slap. So I should read the whole piece to see if she has any interest in or knowledge about the existential global warming crisis that is currently enveloping us, and the contribution of LNG and other fossil fuels to this crisis. But I’m not hopeful.
Canto: So next she’s on about supply issues:
Global LNG supply is inherently inflexible, because increasing liquefaction capacity is costly and slow, and the market remains illiquid, particularly in Asia.[5] Investors know that small increases in demand can create large increases in price. (The converse is also true, small declines in demand create large price falls.)
Whatever that means.
Jacinta: Yes, I’m not sure if she means that the gas remains illiquid. Gas is gas after all, not liquid. But there’s also the term ‘liquid assets’ in economics…
Canto: Yes I hadn’t noticed that. ‘Liquid Natural Gas’ is essentially self-contradictory…
Jacinta: It’s liquified natural gas. And ‘liquefaction capacity’ means ‘the capacity of an LNG facility, measured in terajoules per day, to liquefy natural gas to produce LNG’. So Neill is pointing out, I think, that there’s a market inflexibility because it’s costly to liquify gas, especially in Asia. But saying that the market remains illiquid does create a bit of confusion. But I wonder what this economist thinks of Australia’s RenewEconomy. I notice they have an essay posted a few days ago from Giles Parkinson, an indefatigable RenewEconomy journalist, entitled ‘It’s time to get SwitchedOn and kick gas out of the system: Our future depends on it‘ – SwitchedOn referring to a series about electrification they’re publishing….
Canto: But I think, to be fair, Neill is clearly aware that our economy is currently highly reliant on our gas exports, just as Norway’s economy is highly reliant on its fossil fuel exports.
Jacinta: Good point. Could we kick gas out of the domestic system while exporting endless terajoules of the stuff? Isn’t that what Norway is doing? They get most of their domestic energy from hydro.
Canto: Seems a bit hypocritical I suppose, and here in South Australia we don’t have hydro, but we’ve worked hard to get more of our energy from renewables. We’re still reliant on gas for almost half our energy, but wind and solar together make up the rest – more than half. That’s only going to increase. I’ve now read the whole of Neill’s essay, and she’s made absolutely no mention of renewables. Maybe she’s been living under a rock for the past 30 years, but most likely it’s deliberate – which doesn’t mean she’s anti. She might just have decided to limit her focus on gas.
Jacinta: Well, maybe so, but she’s clearly in favour of more investment in gas, and encouraging more exploration of the stuff. That fact that she ‘blames’ South Australia and other states for not producing more of this fossil fuel, which the IPCC is insisting we should not be producing if we’re to avoid catastrophic global warming, is evidence enough of her contempt for the science, surely.
Canto: But I’ve seen her picture and she looks so cute…
Jacinta: […]
Canto: Anyway we didn’t get round to why energy costs more here, domestically, than in China. Next time perhaps.
References
https://www.bakerinstitute.org/research/why-natural-gas-price-caps-australia-are-poor-policy
It’s time to get SwitchedOn and kick gas out of the system: Our future depends on it