The slow motion trainwreck that is Australian energy policy is accelerating. As are investor’s gains…if they positioned themselves to profit from the shemozzle.
What went wrong exactly?
The gas surplus forecast by the ACCC in January became a ‘looming gas shortage’ by March in The Australian. In April, ‘All sides of politics agree – there is no gas shortage.’ And by May, The Australian reported ‘East coast gas market teeters on brink of crisis’ thanks to, you guessed it, a shortage. A month ago, the shortage became a ‘valley of death’ in The Australian Financial Review.
In short, there’s a risk that Australia’s east coast may be both a major gas exporter and mired in a gas shortage at the same time…
The debate now is whether an official gas reservation policy is needed. Should Aussie gas companies be required to sell some of their produce back home to keep prices here cheap?
According to the exceptional Macrobusiness blog, ‘East Coast Australia became the only gas exporting jurisdiction in the world without a domestic gas reservation policy. We also pay the highest gas costs in the world among gas-exporting countries.’
Quite an achievement!
And so a gas reservation policy appears to make sense.
But I can’t help but wonder…
Isn’t that punishing someone else for our own stupidity?
Why didn’t Australia just buy its own gas when it was cheap like everyone else did?
The Europeans have an excuse. They pegged their hopes on Russian gas. Which blew up in their face. In some ways, literally.
But you can at least understand why. As soon as Trump warned the Germans of the risk of relying on Russian gas at the UN in 2018, all of Europe were duty bound to ignore it.
The gas pipelines are now dead in the water. And the Germans are legislating to prevent them being used.
Not that the Europeans aren’t buying Russian gas, of course. It’s just that they prefer to import it via ships instead of pipelines. The difference? Seaborne LNG is a lot more expensive than the piped stuff…
Depending on which side of the energy bill and climate debate you sit on, more expensive is a good thing. Something tells me Greta Thunberg doesn’t pay her own electricity bill.
The Japanese played the game more wisely. They secured supply agreements from Aussie gas producers as part of the deal to fund gas extraction and export projects.
The result? They don’t just have enough cheap gas. They have a glut. They’re even selling some of the gas bought on the cheap from Australia to other countries.
In the US, even President Biden ensured oil and gas production continued to boom. And the country has become a major gas exporter too, while prices remain cheap domestically.
But what’s our excuse? If Australians want abundant and cheap gas like the countries we are selling our cheap and abundant gas to, why didn’t we just buy it ourselves?
Prices are often determined by substitutes
I suspect the answer to all this is in gas’ substitutes. There are many ways to generate electricity.
Weren’t renewables supposed to take over? Who’d buy Aussie gas in long-term contracts on the cheap when the government is promising renewables will undercut you?
Of course, that hasn’t happened. Heck, the opposite did. The east coast gas shortage was delayed by coal! Our anticipated gas demand fell once the Eraring coal plant’s life was extended, giving gas supplies some breathing room. The alternative to gas fuelled electricity came in to save the day.
It’s worth noting that much the same happened in rather a lot of places around the world in recent years, including Germany and some US states. But not everyone kept their coal online. Some countries blew their coal plants up. And those are the ones stuck with impossible electricity costs today.
Japan’s gas glut was created by another substitute we shunned. The country went back to nuclear power, triggering a huge improvement in its electricity supply balance. Indeed, from next month, my Daily Reckoning articles will come to you from a Japanese nuclear power powered laptop! But the point is that the addition of nuclear power cut gas demand, freeing up supply.
The Europeans made the decision to throw money at the gas problem. They bid for other countries’ gas, leaving poorer nations in the dark. Europeans, meanwhile, pay whopping electricity prices as a result.
So, what are we going to do here in Australia?
We don’t face a gas shortage. There’s plenty of it. We face a difficult choice between a selection of second rate options.
We could pay for gas imports, look to alternative sources of power, allow more gas production to make prices cheaper, or impose a gas reservation policy.
But it’s because we didn’t buy enough gas to supply our own needs in the first place.
So, why didn’t we secure the gas?
Was it green dream delusions about how much gas we’d need? Gas power plants would’ve been risking a lot entering into long-term contracts in the age of Net Zero commitments!
Did we presume that gas would remain cheap on short-term contracts? I mean who would want to burn fossil fuels in 2025 after the glaciers are gone?
Did utilities just forget to buy? Did they expect their hydrogen dreams to come true?
Did we build too many gas export terminals with too much capacity, allowing the gas to leak out of Australia too quickly?
Did we constrain gas production too much with red and green tape?
If you’re hoping for some answers, you’ll have to wait for a mailbag edition of The Daily Reckoning Australia. Because I just can’t seem to work it out. I just find it absurd that we need so much gas, but didn’t buy it.
Let me know your answer: letters@dailyreckoning.com.au
Stepping on the gas
The good news is that the narrative has shifted. Governments around the world are racing to secure their energy supplies. And energy security seems to trump carbon emissions in the new rush for resources.
It’s a whole new energy revolution. How can investors profit from this radical shift?
We have some recent examples to guide us…
Nothing proved as profitable as speculating in gas stocks during the fracking revolution. And renewable energy companies went bonkers until 2021. When nuclear stocks took over.
In each case, investors made a motza by being early.
Today, a new rush for energy resources is beginning. This time with the theme of energy security. And this is the best way to profit.
Until next time,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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