First flash point in what might become a crash course on the “isms” that rule the world of politics is the seemingly dry argument of whether to “reserve” 10% of the gas in Australia for local industry.
At first blush, this sounds awfully like a business question with a very simple answer – exports earn more dollars, therefore liquefy the stuff and flog it to the world.
But a second look unveils the politics of the situation and the potential for a clash between the conservatives who run the country, and the socialists who run the states.
A trigger for the collision of left and right is a state paper produced in Western Australia that argues that some gas should be preserved for local industry – a view trashed by Federal Resources Minister Ian Macfarlane, who says everyone should compete equally and not distort a free market.
Slugcatcher is a bit ambivalent on the tricky question of whether we have a fully free market, or a partly free market, but can also spot an amusing flaw in the argument of the preservationists.
As he understands, their case is based on the idea that reserving gas for the locals will ensure job retention in big gas-consuming employers such as the alumina operations of Alcoa and BHP Billiton.
Everyone with a touch of humanity agrees with this sentiment. But the problem is deeper than that. Why should an alumina business, largely owned by investors in New York or London, be given special treatment by gas producers in Australia?
Sure, there’s the local job argument but there’s also no doubt that the biggest beneficiaries of this distortion of a free market are not Australian, and that the creation of an artificial gas market is a disincentive to explore for more gas, and could lead to the creation of a false economy in the alumina industry with the end result being a disaster when the subsidy comes to an end, as all subsidies do.
The ultimate example of the distortion of a subsidised gas market was seen in Europe over Christmas when the Russians said they’d had enough of selling gas at below market rates to other members of the former Soviet Union. Chaos and great unhappiness followed when the gas price was doubled overnight to make up for years of subsidy.
On the other hand, there is something to be said for ensuring that not all of Australia’s gas is sold to China, Japan and the US. Such an extreme event is unlikely, but it is the potential result of a totally free market where the man with the deepest pockets wins.
The answer to this division of the left and the right is Slugcatcher’s suggestion that local industry should have some form of priority entitlement to future gas supplies – but that local industry should also pay close to the world market for that gas.
This might sound harsh, but the simple truth about WA’s rampant economy with its Chinese-style growth rates is that it is the part of Australia most deeply exposed to world market forces.
Success is due to this exposure to the free market and the absence of government subsidies to keep expensive and inefficient industries operating when they would normally have died. Some car and clothing makers immediately spring to mind when thinking of how government action can distort an economy.
It would be a mistake to allow a similar situation to emerge in the local gas industry where price ought to be the determinant, not a government-controlled resource allocation process.
