Our economy is at a pivotal moment where some form of energy subsidy for manufacturing could be both politically and economically justified.
Post-mining boom Australia badly needs new jobs in high value-added industries. The latest manufacturing results show this happening, but these early signs of growth may be snuffed out by high gas prices.
The Australian Industry Group’s performance of manufacturing index (PMI), released on Wednesday, increased by 8.1 points in February to 59.3. When the index is above 50, manufacturing is expanding, and below 50 it is contracting, so the monthly survey is good news.
Within the index, the measure of ‘production’ increased 15.4 points to 65.3, and ’employment’ rose 7.9 points to 57.5.
But the strong data comes only a day after AI Group warned state and federal governments that if they do not stop playing politics with energy policy, the green shoots of jobs growth in manufacturing will wither and die.
The report notes: “… gas faces international price parity and rising production costs, while all new electricity generation looks expensive and new investment is needed … More available gas will help electricity, as will meeting the existing renewable energy target and settling national coherent energy and climate policy reforms…”
The Australian Workers Union, too, wants lower gas prices and has called on the Turnbull government to renegotiate its contracts with gas giants such as Woodside, Shell, Chevron and AGL to ensure a portion of Australia’s gas is set aside for the domestic market.
This ‘gas reservation’ idea has been around for a while, but Grattan Institute energy fellow David Blowers tells me it’s not the simple solution it seems.
Altering contracts after the energy majors have invested billions raises the issue of ‘sovereign risk’. Overseas investors would get the loud signal that Australia is happy to change the rules mid-game.
That, potentially, would decrease inward investment and harm longer-term jobs growth. Australia currently imports about one-fifth of new capital deployed each year, so sovereign risk should be taken seriously.
Mr Blowers also points out that in Western Australia, where a 15 per cent gas reserve policy has existed since 2006, prices continue to be higher than the national average (see chart below).
UWA Business School researcher Kelly Neill wrote in a recent discussion paper that: “While activity in gas-using industries expands, this does not yield an overall benefit to the economy in the long run. Gas production is reduced and income is foregone because some gas is diverted to lower value uses.”
The long view
Voters overwhelmingly say they want Australia to ‘make things’, and after the tragic demise of auto manufacturing they would surely give Canberra some licence to step in. That said, any such intervention would be useful for a few years at most.
That’s because cost of other energy sources is heading the other way. Large- and small-scale renewable energy systems, and the huge array of storage and management technologies designed to work with them, are falling rapidly.
On that basis, a long-term gas reservation would hold back Australia’s adoption of the new carbon-neutral technologies.
And after so many years of misinformation about what’s really driving up power prices, that’s a delay we can ill afford.
To read more columns by Rob Burgess click here.