Wednesday, July 24, 2013

Australia is behind in the energy wars

Sometimes a looming problem can be so serious that an election skirts around it. That's what is happening in the current German election where campaigning on all sides avoids the fact that German savings are being wiped out propping up troubled European countries (A euro crisis on German ice, July 8).

A very similar situation looms for Australia where the combination of a change in the world energy outlook and bad local mistakes has us lurching towards major energy problems, which will be skirted around at the election. They are too serious for either side to come to grips with.

The debate will concentrate on the froth — whether there should be no carbon tax (Coalition position) or an emission-trading scheme (ALP position). Electors will discover that there will be at least some reduction in power prices and might learn that the carbon levy they pay via the government's emissions trading levy (albeit lower than a carbon tax) will not stay in Australia but be sent overseas to be spent reducing overseas emissions. We will then be blasted for having too high emissions. It's bizarre

But that's a minor part of the story. In his KGB interview Origin chief executive Grant King takes us to the next stage of our looming problems (Origin rejects capital raising talk, July 22)

The first problem is that we have a legislated program to generate 20 per cent of our power via renewables but power consumption has fallen rather than increased as expected. Grant King estimates that the legislated renewables tonnage will now equal 30 per cent rather than 20 per cent of demand and because the carbon levy is to be lower or nil, renewables effectively will cost more to build and therefore the community must pay more for the power they generate. With 30 per cent of our power coming from high-cost renewables, King warns more price rises are in the pipeline. Farewell carbon tax. Welcome renewables in the US they estimate that they have discovered oil deposits that equal all existing global oil reserves plus enormous amounts of gas. Thanks to the oil embargo on Iran and the Syrian war, oil prices have stayed up but, in my view, unless there is a complete blow up in the Middle East, oil will be under long-term price pressure as the US ceases to be a major oil importer and Middle eastern production rises.

Grant King is much more optimistic about long term oil prices than me but he underlines that exports of Australian LNG are linked to the oil price. The fall in the Australian dollar has already helped Origin.

Australia lives on the back of LNG, coal and iron ore. America as changed the game in LNG and to some extent in coal and we must hope that China does not go into a period of low growth in demand for energy and iron ore.

But it gets worse. On the east coast we have exported or committed to export our low cost gas. To justify spending large sums to discover more gas for local use the domestic price must double again — it has already risen sharply. Currently the US gas price is about US$3.80 per million British thermal units (mBTUs). We export from Queensland at around seven or eight dollars per mBTUs but to justify exploration of Australian shale for the domestic market we will need about $9/mBTU — around twice the US price.

Our LNG customers in Japan and China are bemoaning the fact that they can't compete with the US. The same will apply in Australia to our manufacturers who will also be paying the "renewables tax".

Prime Minister Rudd understands that we must find a way to boost manufacturing to offset the looming minerals decline but I don't think he has any idea of the depth of the problem. I am not sure the Coalition fully understands the issues.

The only way out will be a much lower dollar but that will lift interest rates.

None of these issues will be raised in the election.

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