‘A good part of the capital which had [been] so lavishly employed in the import trade, they are gradually diverting into that safer and infinitely more productive channel — the oil-fisheries…the whaling merchants are public benefactors, entitled to the gratitude of the whole community. They are stopping the inlets of Australian poverty and opening those of Australian wealth.’
Sydney Gazette, 18 March 1830
The Second Fleet, a convoy of six ships containing convicts, settlers, and supplies, landed in Sydney in 1789. It was a notorious voyage. 25% of the convicts on board died en route, and 40% were dead within six months of their arrival.
The private contractors who arranged transport and provisions were blamed. The authorities obviously didn’t instruct them to get their human cargo to Sydney in one piece. A reminder — if any is needed — that economics is all about incentives.
This debacle, which put the fledgling settlement on the brink of starvation, provided an opportunity for an enterprising whaling captain named Samuel Enderby.
Enderby was heavily involved in the British-American whale trade through his fleet of ships. However, following the American Revolution, an embargo was placed on exports to Britain. This included whale oil.
Before the discovery of petroleum in the 1850s, whale oil was the primary machine lubricant and preferred lamp oil in Europe and North America.
Enderby, in search of new markets, lobbied the British Government to allow whalers to transport convicts to Sydney and to then continue hunting whales in the Southern Ocean.
That way, he could make money on both voyages — human cargo on the way out and whale oil cargo on the way back.
In 1791, the Third Fleet left England for Sydney. Of the 11 ships that landed, five continued to hunt in the Southern Ocean, establishing the whale oil industry in Australia.
According to the National Museum of Australia:
‘Whaling became an essential part of the New South Wales economy and culture. Whalers were the most frequent visitors to the colony in its first decade.
‘Whaling was Australia’s first major industry with thousands of men and hundreds of ships eventually involved in the trade.
‘The peak of Australian whaling activity was between 1820 and 1855, with up to 1,300 men working in the industry each year. With the 1851 discovery of gold in Australia, however, sailors deserted their ships en masse to travel to the goldfields. As petroleum increasingly replaced whale oil throughout the 1850s, the industry went into decline.
‘An industry that had provided New South Wales with 52 per cent of her exports in 1832 provided less than one per cent by 1855.’
The prosperity that the whale oil trade brought to the colony of New South Wales wasn’t lost on the public, as highlighted by the Sydney Gazette quote above. The whaling merchants were ‘benefactors’, preventing poverty and increasing wealth.
How times have changed.
In 2022–23, Australia’s exports of liquid natural gas, coal, and oil are expected to total $225 billion. That’s 50% of our total resource exports (the same as whale oil at its peak).
Yet the industry is vilified and shunned. Wealthy activists and university-educated know-nothings want to shut these industries down.
They only see the world through the prism of emissions. They don’t see the other side of the balance sheet. These exports help provide food, shelter, and heating for millions of people. And they pay for schools, hospitals, and a bloated public service for Australians.
We’re a long way from the gratitude shown to our vital industries back in the early years of settlement. Back then, before the welfare state saw the government become everyone’s ‘benefactor’, there was a much greater awareness of what the wealth-creation process was all about.
To the modern mind, killing whales to harvest oil is abhorrent. But back then, it was entirely acceptable.
Thankfully, technology saw the whaling industry quickly decline through the large-scale discovery of oil and its refinement into petroleum products. Moreover, this discovery made energy much cheaper.
Cheap energy (along with free markets and the rule of law) is vital for increasing living standards. The more a nation’s wealth is devoted to energy expenses, the less wealth is available for other endeavours.
That’s why this transition to renewables is so contentious. Politicians see it as a vote winner and are ploughing ahead regardless of cost. But the more we force it to occur in an unnaturally short time frame, the greater the costs will be.
The rallying cry of the zero-carbon advocate is that renewable energy is free. Yet the more we invest in it, the higher our energy prices become. Why is that?
Making millions of non-renewable solar panels and wind turbines is not free…
Building extensive transmission lines to connect these far-flung new energy sources to the existing system is not free…
Building backup supply to support and guarantee intermittent renewable generation is not free…
Those investing in this new infrastructure will want a return on their substantial investment. And you’ll be paying for it.
At the same time, traditional energy forms have suffered from chronic underinvestment.
Technology has driven all prior energy transitions. As a result, the cost of energy has declined and contributed to the broad rise in global living standards over the years.
This energy transition is different. While technology plays a role, it’s not the driving force. Politics is. As a result, this energy transition — for the first time in history — will result in a higher cost of energy and a commensurate reduction in living standards.
It doesn’t have to be that way for Australia, but I don’t like our odds.
Australia is a net energy exporter. In 2020–21, we exported 15,420 petajoules and imported just 2,115 petajoules (see below).
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| Source: Energy.gov.au |
We stand to benefit massively from the structural rise in energy prices in the years ahead. Meanwhile, net energy importers, like the UK, Europe, and Asia, will have to spend more on their energy needs.
While beyond the scope of this report, this dynamic will have huge implications for international capital flows and trade balances.
As just one small example, look at Germany. Long famed as a high value-added exporter, it’s built up considerable trade surpluses, especially post-reunification in 1989/90. But as you can see below, thanks to the energy crisis, its trade surpluses have collapsed.
It’s now using nearly all its export wealth to pay for its energy needs. If this continues (not just for Germany, but for others like it) it will have huge implications.
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| Source: Trading Economics |
Anyway, the point is that Australia’s very well placed to benefit from this energy-induced power shift. But as I said, I’m not hopeful we will invest the dividends wisely.
For evidence of this, you just have to look to Queensland, one of the most naturally endowed states in Australia.
In late September, the QLD state government announced a $62 billion ‘Energy and Jobs Plan’. This includes a new renewable energy target of 70% by 2032 and 80% by 2035.
Currently, renewables generate around 20% of Queensland’s electricity needs. Coal provides 60% and gas 10%, with biomass accounting for the remaining 10%.
Under this new plan, all state-owned coal plants will be shut down by 2035.
What will replace this critical and cheap energy source?
New hydro dams.
Now, just to be clear, I’m not criticising adding hydro energy to the mix. But trying to REPLACE cheap and reliable energy with hydro is a big risk to energy security.
Hydro works by having two reservoirs, an upper and a lower one. It generates electricity by letting the water in the upper reservoir flow through turbines (a process that generates electricity) into the lower reservoir.
One of the issues with the proposed hydro dams is that they’ll have just 24 hours of storage capacity. This means they’ll be able to produce reliable energy for just 24 hours before the upper reservoir needs refilling. (That compares to the Snowy Hydro 2.0 product, which will be able to produce energy for seven days.)
This requires a lot of energy to pump the water back up from the lower reservoir, energy that’ll have to come from wind and solar (and presumably backed up by gas plants).
In 10–15 years’ time, Queensland risks having some of the highest electricity costs in the world while remaining one of the largest exporters of fossil fuels, helping keep other countries’ electricity costs down.
I know this isn’t a popular take. You may agree or disagree. But the historical record shows that governments driving investment decisions based on arbitrary targets is a recipe for disaster.
Economic growth and higher living standards for our kids come from, in part, technological advances that LOWER energy costs.
This time around, our brain-dead politicians seem to be spending our energy export windfall on technologies and projects that are almost guaranteed to increase energy costs and decrease our standard of living.
But it’s for your own good…
And there’s really not much you can do about it. Despite ample evidence from Europe that renewable energy is nowhere near capable of powering the economy, Australia continues to panic towards net-zero targets with the Mr Micawber-like hope that something will turn up to make it happen.
The odds are against it…
As I explain in this exclusive report, your best hedge against political insanity on energy policy is to have an overweight allocation to quality energy stocks. Read it here.
Regards,
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Greg Canavan,
For The Daily Reckoning Australia
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