QED

Crimp Supply, Prices Rise. It’s a Mystery!

No relief on the horizon for world energy prices. More Angst for Albo. The Energy Information Administration (EIA) has forecast that natural gas prices will spike upwards in the U.S. in coming months. Not surprising; it’s the northern winter. Ditto for Europe. People get cold in winter. Chris Bowen has the answer: build more wind turbines.

I would suppose that a cessation of hostilities in Ukraine would help. But that seems unlikely. One side, Russia, cannot lose. The other corrupt state is being buttressed with a continual supply of high-tech weapons from America. Result, bloody stalemate. America has deep pockets and can go on handing out weapons indefinitely. And why do that? Cui bono leads to the military-industrial complex. Lots of loot being made, and no doubt also by war profiteers inside Ukraine.

Never mind, the bright sparks in our government and in Treasury are flirting with taxes or price caps on natural gas, and perhaps coal, to lessen the pain of high energy prices on Australian businesses and consumers. What a Labor government does, a Labor government does. With exceptions (the Hawke-Keating government, for rare example) economic irrationality and illiteracy is common fare. Treasury, on the other hand, used to have a reputation for economic rationality and literacy. That reputation is long gone.

Ken Henry, at the wheel in the aftermath of the 2009 financial crisis, dealt it a deadly blow with the over-the-top fiscal response to the crisis and, then, that idiotic and infamous Resources Super Profits Tax. Now we have Steven Kennedy trying to outdo Henry. Look at this reported comment; and no, it is not the ACTU spewing out leftism, or the Fabian Society, The Australian Institute, The Monthly, The Conversation, or the ABC.

“The current gas and thermal coal prices increases are leading to unusually high prices and profits for some companies; prices and profits are well beyond the usual bounds of investment and profit cycles… Policy responses could take many forms but in the current circumstances of generalised price pressure, they need to be mindful of not contributing further to inflation. This would suggest to us [him and his lefty treasury mates?] that interventions that directly address the higher domestic coal and gas prices are more likely to be optimal.”

What does this bolshie (“profits are well beyond the usual bounds”) statement mean? I take it to mean that he is advocating price caps. Maybe taxes? This is quite extraordinary stuff. It is an intrusion into the political debate and a half-baked one at that. Half-baked because it is not completely clear what he does mean; or, if indeed he means price caps, what they would look like and how they would be implemented and policed.

In a saner, more disciplined world, Treasury might well come up with several well-defined options to deal with high energy prices, rigorously examine the potential consequences of each, and present the results for the government to decide. We no longer live in that world. We now live in a world where the head of Treasury goes around half-cocked hinting vaguely about what might be optimal policy. Optimal, now there’s a concept to conjure with. Optimal for whom?

One piece of reading which I would recommend to public-sector economists is Frédéric Bastiat’s short book, That Which is Seen, and That Which is Not Seen. In fact, I would make it required reading. Price caps or taxes have consequences, not all of which are readily visible. In this case, those consequences are potentially messy. (http://bastiat.org/en/twisatwins.html)

Take price caps. Natural gas and oil are supplied onto the domestic and foreign markets. I assume, Ttreasury would not suggest imposing price caps on gas or coal sold offshore. Thus, a price cap on domestic supplies will encourage companies to restrict domestic supplies and sell more offshore. Not what’s wanted. So, a domestic price cap will need to be supplemented with enforceable rules to require companies to supply their product at less than the price obtainable on the world market. Hint: this is a clue as to why socialism inevitably leads to despotism.

How much product must be sold at below-market prices is a question, and at what specific below-market prices and for how long? How are the required domestic supplies to be divvied up between suppliers? These are some of the questions. Here are some more. Will price caps deter production by making the extraction and delivery of some marginally profitable supplies uneconomic? In the longer term, will they deter development? Capricious taxing by governments does not instil confidence in those contemplating investment – often spending billions of dollars in hopes of earning profits “well beyond the usual bounds.” Something of which we now learn treasury mandarins disapprove.

Taxes have their own complications. How much, on whom. Dispensed how much, to whom. Taxes too do not fall wholly on the taxed entity. The incidence of taxes is hard to forecast. In general, they fall partly on shareholders, on suppliers, on employees and on customers. And it’s hard to tell who’ll bear what. In this case, the Japanese are apparently worried that some of it, as buyers of natural gas, will fall on them. I suppose it would unless they have contracts which prevent this happening. More sovereign risk for future overseas investors to worry about.

An option worth considering: inspire confidence that elevated energy prices are temporary. If that were the case, most businesses and individuals could handle it. This could be best done by freeing the development of oil, gas and coal. Some of that development could be reserved for domestic consumption. Nothing amiss in that, provided those are the rules from the start. Santos’s Narrabri gas project, for example, is committed to delivering all of its gas onto the domestic market.

A small problem. Narrabri is now 14 years and about $1.5 billion in the making and still not finally approved. You simply couldn’t ever, ever make it up. Why isn’t Kennedy loudly and persistently broadcasting the economic madness of governments complaining about price rises while restricting supply. Now that’s squarely in the remit treasury; of any economist who understands how free markets work. How many of those are still in treasury, I wonder.

23 thoughts on “Crimp Supply, Prices Rise. It’s a Mystery!

  • sfw says:

    Apparently the useless Vic Libs are promising to allow the development of more gas fields in Victoria but only if the gas is 100% used only in Vic. Much the same thing as a price control, What company will spend the capital to develop the resources with a controlled market?

    The Victorian Libs are both useless and utterly ignorant. It’s as if they’ve made no plans to take power and what they would do if they get it.

  • ianl says:

    How will taxing exports (as Rex Connor did in the first Whitlam Govt) reduce the domestic prices of the commodities being taxed ? Our Treasury did not address that question; the lefty cheerleaders in the MSM have not either.

    Breaking long-term contracts with overseas customers, most of whom have also invested heavily in exploration and development of the various resources, is not simply some “sovereign risk” to be lightly batted away (“It’s only foreign money – who cares ?” as I’ve been told by people who want the money without the investment risk), but absolutely invites heavy and targeted litigation from those with very deep pockets. I hope Albanese and Bowen try this tactic.

    • Paul W says:

      It will discourage offshore selling, leading to increased domestic supply, and generate revenue for the government.

      • ianl says:

        There are signed longterm export contracts.

        Are you suggesting these be broken ?

        If not – and perhaps you really believe they should – then where is the incentive to supply the existing longterm domestic contracts ? These are already well serviced, unlike the power generations (which is where the power supply shortfalls actually occur).

        I suggest you just want to thieve other peoples’ property (return on risk) without the actual risk of initial investment.

  • Ian MacDougall says:

    “A small problem. Narrabri is now 14 years and about $1.5 billion in the making and still not finally approved. You simply couldn’t ever, ever make it up. Why isn’t Kennedy loudly and persistently broadcasting the economic madness of governments complaining about price rises while restricting supply. Now that’s squarely in the remit treasury; of any economist who understands how free markets work. How many of those are still in treasury, I wonder.”
    One further problem, Peter. On the Narrabri field, the coal and gas deposits they want to frack lie below the sub-artesian aquifer that supplies the region with its only reliable water for stock and domestic purposes. So to get at the short-term, non-renewable gas, the drillers have to drill through the aquifer, which has to last as long as the human and animal need for the water; ie essentially forever. By the time ‘concrete cancer’ is creating problems with the proposed reinforced concrete plugs, the frackers will have taken their loot and skedaddled.

  • wstarck says:

    Reason and evidence have proved to be a serious impediment to political correctness and Woke ideology so they have had to be eliminated from our educational system. As the first full generation of Gen Woke moves into positions of influence and control there may be some adjustment necessary to accommodate (or redefine) reality.

  • Paul W says:

    What the treasury boffins referred to by “profits are well beyond the usual bounds” is the fact that the profits of energy companies are above not only the historical average but also are well beyond record levels.
    There isn’t a shortage of supply. There’s a shortage of supply to the Australian market as most resources get shipped off to foreign markets where prices are higher and costs lower; simultaneously the sellers in Australia engage in cartel behaviour to floor prices here at still high levels. Those 2 things together are the cause.
    No lower prices will come while there’s more profit to be made doing the above. Supplying more gas domestically won’t change prices while there is cartel behaviour, and stopping cartel behaviour won’t change prices while most is getting sent overseas.
    Consequently, it makes perfect sense to cap domestic prices to something that isn’t daylight robbery and simultaneously to make sure a minimum amount is sold to the domestic market.
    You gave the game away when you said “Some of that development could be reserved for domestic consumption.” The issue is that this was not done previously but it was done here in Western Australia 15 years ago by Labor premier Carpenter. It wasn’t done over east because the resource companies intimidated you, but Carpenter took them on and won. Enjoying the fruits of corporatism?

    • STD says:

      “Some of the development could be reserved for domestic consumption”.
      Singaporean prime minister Lee Kuan Yew summed up our present predicament in 1980,” Australia was at danger of becoming the poor white trash of Asia” – we will get what we are given ,and here we are.

    • Peter Smith says:

      Paul W, to impose conditions on a lease ex ante might be good or bad, but it is ethically sound and, therefore, in keeping with the way free-markets work. Imposing condition ex post is ethically unsound and, therefore, not in keeping with the way free markets work. Free markets of course are the wellspring of our prosperity. Imposing price caps and forcing companies to supply at the set price is unethical; it is socialism, pure and simple.
      As to there being plenty of supply. The products in question are sold on world markets where price movements ensure that supply and demand meet. There is no sense in talking about an excess of supply or demand without bringing in price.
      As to so-called record profits. I doubt the current profits coal and gas companies have not been exceeded by some companies, somewhere, doing something. Acumen and luck of the draw. I always notice among socialists a reluctance to talk much about large-cum-record losses; and what to do about them.

      • STD says:

        “I always notice amongst socialists a reluctance to talk much about large-cum-record losses and what to do about them”.
        Privatise the profits(corporates) and socialise the losses( government taxation).

      • Paul W says:

        Peter Smith,
        It isn’t unethical to impose conditions ex post if the original conditions-free decision was itself unethical, which is the case here because corporations intimidated the eastern states’ governments into surrender.
        Price caps are absolutely not unethical and it is not the same as price setting. This isn’t socialism. You are advocating for corporatism and I believe that is unethical.
        Price caps can be an effective mechanism to stop cartel behaviour, something you completely ignored. This kind of problem is not new and not unique to the energy market – so why not look to the methods that have worked elsewhere? That is, setting caps, controlling exports, and standing up to big business and its bullying.
        There is enough supply in Australia and most of it is going to power other nations. This is a fact.
        Your statement that current profits of energy companies have probably been exceeded “by some companies, somewhere, doing something” is a bait and switch as we are only discussing energy companies in Australia.
        The energy companies operating in Australia intimidated governments into adopting policies that were good for them, and your plan is to reward them by allowing them to continue doing it. There’s a sucker born every minute.

    • ianl says:

      >”… there’s a shortage of supply to the Australian market as most resources get shipped off to foreign markets where prices are higher and costs lower …”

      That’s absolute B/S. See my reply above.

      The domestic power generators already have longterm domestic supply contracts for medium quality coal fuels at contracted domestic prices. Shortfalls in power supplies (blackouts) occur because the generators are not maintained – which is understandable when they are constantly threatened with closure. Exporting coals does NOT affect the domestic supplies to domestic generators. Got it ?

      But typically, you propose to maraud other people’s property (return on risk) and sell this to the public on greedy envy. Better to tax windfall lottery winnings … as if.

      From recent professional experience, the export prices of high quality thermal coals (aka “Newcastle 6000”, meaning world benchmark 6000kcals/kg) abruptly rose to unprecedented levels over four years *before* Putin turned thug ugly. The cause of this rise was the worldwide realisation that modern cities cannot be run on wind and solar. Panic ensued as the NH winter stockpiles became threadbare, so demand for high quality thermal arced up as that particular penny dropped.

      Whenever envy becomes piqued, crabwalkers abound.

  • Daffy says:

    The basic problem we have here is that the average person seems to think that profits are a form of evil. Business never really gets on the front foot to explain that profit is essential to our general prosperity and represent the value added to inputs by human creativity and ingenuity. Which value is then available for further investment or spending; either way, creating jobs and engendering even more wealth. No profit means that no value has been added to inputs and no one in their right mind would undertake such a venture, which would quickly turn to creating losses, and losses accumulate to reduce wealth.

    • STD says:

      Understood and agree.
      However profits should not come at the detriment of society or your fellow man .or do we all live in parallel universes when where at work or home.
      There has to be a social dividend or consequence – ask your wife-50% divorce rate?????????????????
      Sure we are prosperous ,however we now have a society that lacks any semblance of soul.
      Get rid of the corporate pigs that have monopoly over and ransacked our society , culture and health, and return to family friendly policies- we can do without the Ken Henry economic model which has come at the expense of every societies socialist unit ,the family.
      Ethical banking practices may be a good start.

      • Peter Smith says:

        Profits benefit our fellow man. The more profits the better. More investment, more technological progress, more jobs, higher wages, abracadabra prosperity.

        • STD says:

          Greed and avarice Peter, that’s what I’m squaring up on. I have absolutely no problem with free enterprise and profits.Globalisation is unfettered greed incorporated..

  • Geoff Sherrington says:

    Peter,
    Writing letters to decision-makers has become as frustrating as kicking treacle.
    Maybe there would be benefit if more people actually sent such letters as well as conversing about them
    Geoff S
    http://www.geoffstuff.com/rba.docx

  • Geoff Sherrington says:

    After some decades in the resources sector, I switched from scientific work in exploration to manage government affairs for a large Aussie company. Although reluctant to do this, I was driven by the reality that most of my time was latterly being spent combatting the moves of politicians and bureaucrats. This interference has got much worse since retirement. It needs radical surgery in houses of parliament.
    Sovereign risk ranks high in the minds of resource sector opeartors, seemingly less in the bureaucracy. IMO, sovereignty should only be risked in extreme circumstances, like with declaration of war on an enemy. Resource sector operators are not your enemy.
    As for the veiled suggestion that unexpected profits by operators be taxed, this would result in an above-budget windfall by the taxing government. Questions: What good does it do to transfer windfall dollars from the private sector to the public sector? Should the public sector then be taxed? Life cannot be a one-way street. Geoff S

    • ianl says:

      Yes, Sovereign Risk is a big factor in investment considerations. Fifty years in the resources industries has told me that time and again. It’s also most obvious that every time the ALP gains power federally (Whitlam, Hawke, Rudd, Albanese), it has another go at high taxing the miners. So annoying for the federal ALP that the States own the minerals (Territories excepted).

      The current crabwalk argument in pushing a “windfall” tax on coal and gas exports is that it will encourage production for domestic consumption (by lessening export production costs) thus reducing costs to the domestic power stations and their customers while increasing reliability of fuel supply.

      Wrongo, of course.

      Domestic coal-fired power stations all have long term fuel supply contracts at domestic prices (which are jealously crimped by State Govts). These contracts are for medium to mediocre quality coals which the domestic power stations are deliberately designed for.

      Of course there are periodic shortfalls in individual supply, but the mining operation whose shortfall it is scrambles in top gear to find another operation which has suitable coal available while it rebuilds its’ own stockpile for its’ next contract tranche. This shortfall fill-in is certainly charged to the mining operation trying to fulfill its’ contract at whatever price the fill-in supplier can reasonably impose (carefully, since it itself could likely face such a situation at some point) – BUT this price spike is not passed on to the power station. The shortfall mining operation wears that short term loss. This has been so in my hard experience for over 50 years.

      As I’ve just described, extra taxing of “windfall” export returns will not relieve the domestic supply situation. It will satisfy the envy of the crabwalkers though, and will be applauded by most of the MSM for exactly that reason.

  • Peter Marriott says:

    Spot on Peter, as usual in my eyes. We live in a free enterprise country, the best kind. Take away the incentive to maximise your profits and you’ve no longer got free enterprise. Maximising profits in the mining , manufacturing and agricultural industries always means more jobs and good wages, the right way to go for a free enterprise commercial society like ours.

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