Down With Gasbagging : The Case Against Protectionism (Via Preferential Pricing) for Local Users

Stone the Crows! Suddenly it’s the 70’s – the decades in the nineteenth  and twentieth centuries both.

Scary signs of a return to the age of glam –rock and the big spending state sparkled in the skies over the summer. The first was the Gillard Government’s announcement it was committed to a budget surplus but only sometime in the present geological age. They were confirmed by President Obama’s second inaugural address last week.

As for the 1870s, there is a blue between free traders and protectionists brewing, taking us back to a time when the great Australian political divide was less between capital and labour than entrepreneurs and rent seekers.

And whoever wins the latter fight will ensure whether the former culture sends us broke sooner or later.

The Gillard Government was making a virtue of necessity long before Treasurer Wayne Swan confirmed what might have surprised especially remote Amazon tribes – that there was no chance of a budget surplus this year. [i]

For a start, the Prime Minister started talking up unfunded, perhaps unfundable promises on school education and disability support as if something being good made it automatically affordable.  “The National Disability Insurance Scheme is the right thing to do. Now is the right time to do it,” as Julia Gillard put it last month. [ii]

But not, apparently, the right to time to worry about paying for it, because economic realism is on the nose since the GFC. As South Australian Premier Jay Whetherill demonstrated the other day, even pretending to care about cutting public expenditure to balance the budget is off the agenda:

 It is a worrying time for people. In times of uncertainty there are a lot of people who rely upon government, and they are going to look to the Labor Party as a traditional source of protection and support. I think this idea of slashing and burning the public sector is not going to be a very attractive proposition. [iii]

The rationale for this sort of profligacy formed the basis of President Obama’s election campaign. And, as his second inaugural demonstrated, he sees welfare spending as a vote winner:

 We do not believe that in this country freedom is reserved for the lucky, or happiness for the few.  We recognise that no matter how responsibly we live our lives, any one of us at any time may face a job loss, or a sudden illness, or a home swept away in a terrible storm.  The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative, they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great. [iv]

Expect copycat rhetoric from the PM as she seeks to spend her way out of strife in this election year by creating a voting coalition of public sector workers and welfare recipients.

Which puts us back in the 1970s, when governments and electors thought they could borrow forever and that spending was its own political reward, without interest in assessing the efficiency of outlays.

But what is even worse is the return to the second half of the nieteenth century when the essential political divide was between free traders and protectionists – the first Labor MPs elected in NSW, in 1891, split over industry assistance[v].

The new fight in this ancient Australian argument is over energy and whether it should be sold to the highest bidder or kept at home for protected industries.

In 2007, domestic industry in Western Australia warned we are exporting gas needed to fuel local industry at affordable prices, justifying government intervention to correct market failure: 

Such intervention should aim to avoid being excessively costly, and should be the minimum necessary to correct the failure. While the relative costs and benefits of possible interventions to secure long term domestic gas supplies are hard to estimate precisely, there is an economic case

for ‘no regrets’ or near ‘no regrets’ interventions that are likely to result in efficiency improvements in the domestic market.”

[vi] 

Equivalent arguments for the east coast are escalating in the policy press. Paul Cleary outlined the issue last weekend: “Major industrial users report they are unable to secure new contracts with major producers because all available gas is contracted for export markets.” [vii] 

As did the AFR: “Australian manufacturers are facing a gas crisis, including absolute shortages, because of Canberra’s export-first policies.”[viii] 

So what’s to be done? Not much, according to the Feds. Last year’s energy white paper acknowledged “there are likely to be short-to medium-term transitional pressures in the eastern market until project start‑up risks diminish and new trading dynamics are established. These transitional pressures will manifest in tighter supply and higher prices.” But, given some 70 per cent of liquefied national gas capacity now being built is in Australia, all will be well: 

The Australian government does not support calls for market interventions such as a reservation policy. Such measures should be a matter of last resort, undertaken only where there is clear evidence of market failure. Currently, there is no compelling evidence to support this.[ix]

A view the energy minister still holds: 

Mr. Ferguson said the best way of getting gas resources out of the ground was through market-based pricing that drove new production. But it was incumbent on the gas industry to maintain a balanced supply for the domestic and export markets. [x] 

But the opposition is ambivalent. Last year, energy spokesman Ian Macfarlane told The Australian’s Paul Cleary that he supported “the idea of acreage reservation for domestic production, whereby certain areas are set aside, wholly or in part, for the extraction of gas for the domestic market …and it’s got to be at a fair price,”. [xi] 

And, earlier this month, industry spokeswoman Sophie Mirabella added that while the energy policy was still being developed it would, “balance the interests of local users and international markets”, and rejected the notion that the Coalition would be “interventionist.” [xii] 

Perhaps the Crows spent too much time in the summer sun, but they struggle to see how the government choosing who gets how much Australian gas and at what price is anything other than interventionist. 

Even if local industry does it tough due to international gas demand, it does not make a case for protectionism via preferential pricing for local users. 

Not unless we want to end up like Iran which is perpetually short of petrol, despite having oil to burn. State control of the industry and subsidised prices ensure efficiency is out the window, to the point where the country imports petroleum.[xiii] 

So, where are we now, with a Labor minister happy for the market to set gas prices and Liberal shadows considering the possibility of government regulation to assist local industry struggling to compete? Pretty much where we were 50 and 150 years ago with a political divide based on attitudes to industry assistance. 

Of course, none of the advocates of protected supplies of LNG want anything that interferes with the market for long, it’s only times are so tough and competition

so cruel just now. 

But ‘twas ever thus and the case against “temporary” protection to build up locally employing industries is the same now as at the end of the nineteenth century, when Imperial mandarin Louis Mallet warned, “No government in the world can be trusted to confine its application to the limits originally proposed, or to abandon it when its avowed objects have been fulfilled.” [xiv] 

The more things change the more gas stays aflame (sorry).

ENDNOTES


[i] David Uren, “Labor exposed as Treasurer Wayne Swan breaks surplus promise,” The Australian, December 21

[ii] ABC Radio, The World Today, December 3 @ www.abc.net.au/worldtoday/content/2012/s3645947.html recovered on January 26

[iii] Sarah Martin, “Wind in his sails, Labor’s golden boy Jay Weatherill eyes line,” The Australian, January 12

[iv] Barack Obama, “Inaugural Address, January 21 2013,”  @ www.whitehouse.gov/the-press-office/2013/01/21/inaugural-address-president-barack-obama recovered on January 26

[v] Martin Mulligan, “Whose party is it anyway? On the origins and character of the ALP, Social Alternatives, 10, 3 (1991) 49-51, 50

[vi] Synergies Economic Consulting, “WA gas supply and demand: the need for intervention,” (July 2007) 73 @ http://www.domgas.com.au/pdf/Alliance_reports/Synergies Report – Jul 2007.pdf recovered on July 25

[vii] Paul Cleary, “Gas boom wont keep the home fires burning,” The Australian, January 19

[viii] Peter Roberts, “Gas crisis looms for manufacturing, says Brickworks,” Australian Financial Review January 19 and Angela Macdonald-Smith, “Gas producers reject Brickworks’ claims,” Australian Financial Review, January 21

[ix] Department of Energy, Resources and Tourism, Energy White Paper 2012: Australia’s energy transformation, 157 @ http://www.ret.gov.au/energy/Documents/ewp/2012/Energy_ White_Paper_2012.pdf recovered on January 26

[x] Matt Chambers and Sid Maher, “Domestic buyers punt on cheap gas and lose,” The Australian, January 22

[xi] Paul Cleary, “Libs look to set aside gas for home market,” The Australian, June 12 2012

[xii] Cleary, “Gas fires,” ibid

[xiii] US Energy Information Administration, “Country analysis briefs,” November 2011 @ www.eia.gov/cabs/iran/Full.html recovered on January 26

[xiv] Edmund Rodgers, “Free trade versus protectionism: New South Wales, Victoria and the tariff debate in Britain 1881-90,” 11 @ http://www.nla.gov.au/openpublish/index.php/australian-studies/article/view/1567/187 recovered on January 26