How did we miss this? A giant Costco has opened in Melbourne down at the Docklands. Costco is discount warehouse shopping at its finest. The mammoth stores are stocked to the gills with everything from nappies to red meat. The store in Melbourne opened its doors yesterday morning around 4:30 AM.
And none too soon! The big box retailers are soon to be dinosaurs. They are living monuments to cheap energy and globalisation. Only cheap energy and cheap global labour make it possible for goods to be shipped this far and sold this cheaply.
We thought this era of retail decadence was well and truly over with the Global Financial Crisis. But the Costco opening is a nice, nostalgic coda to the whole era of misallocated real resources and capital. While the suburban-retail-housing economy of America crumbles, Australia has built a small shrine to that way of life down in the Docklands.
Mind you, we don't have any problem with lower prices. There's a bit of snobbery about American attitudes toward Wal-Mart and other giant retailers like Costco. After all, isn't it a good thing when a large part of the population can reduce the amount of money it spends on basic food and necessities? These stores really do lower prices on the things people buy every day. To that extent, they should be celebrated as an achievement of capitalism.
Of course there are consequences to organising your economic life around discount retailing. Mom and pop shops-mostly neighbourhood places with friendly faces (if higher prices)-can't compete with goods and textiles imported by the container ship full from Asia. The folksy local retailer is crushed under the heel of the big box with the big global footprint.
This necessarily changes the job market too. Some small businesses-usually the largest employer in an economy-go to the wall if the big box retailers start popping up everywhere. More and more jobs in the economy shift to lower-wage retail sales. Fewer people are employed making things and more are employed selling them (often on credit).
Gosh. It feels like we're writing a history of what happened to the American economy over the last twenty years. Cheap oil, credit, the container ship, sophisticated logistics systems...all of these combined to deliver a one-off massive decrease in the cost of living for Western workers. Whether or not the lower cost of living resulted in a higher quality of life is a different question. And the trade off was the slow erosion of real wages from globalised labour.
Anyway, the appearance of the Costco in Australia is like a time machine from the retail past arriving. A massive Tardis from Dr. Who, filled with the cheapest underwear on offer and mountains of washing detergent, deeply discounted. We will probably head on down this weekend to see if they have Coca Cola by the barrel.
Nothing in the market can compete with our excitement about the appearance of Costco. But yesterday we speculated that energy would be the best inflation beater of the next ten years. And out in Perth, The West is reporting that, "Australia is on the verge of another WA-led resources boom that promises to dwarf the last surge, lock in thousands more jobs and be worth billions of dollars to WA businesses."
The paper refers to the Gorgon LNG project. Gorgon is not, at least in this case, an ugly, snarling, snake headed female figure from Greek mythology. Nope. In this case, Gorgon is a $50 billion Liquefied Natural Gas (LNG) project that aims to produce 40 trillion cubic feet of LNG off the coast of Barrow Island in Western Australia. The project exists because energy itself is no longer cheap, but still in demand.
The main partners in the development of Gorgon are Chevron, Exxon Mobil, and Royal Dutch Shell. In fact, just last week Exxon signed a $25 billion deal with India's Petronet to sell 1.5 million tonnes of Gorgon LNG to India each year for the next twenty years. That's a big off-take agreement. There will be more, probably from firms in India, China, Japan, and Korea. Asian power utilities prefer cleaner-burning LNG in their electricity producing plants.
A final investment decision by the partners is expected early next month. But that's a near certainty now. With the WA and Federal governments granting the environmental permits necessary, there was only one big hurdle left, and that was cleared yesterday. Once it's played out, the Gorgon field has been identified as a place to store captures carbon dioxide.
Yesterday, the Federal government indemnified the partners once the site is closed. That essentially means that the gas partners are responsible for producing LNG. The Federal government, meanwhile, assumes any risk if there is a problem with using the site as a place to store captured carbon dioxide.
Gorgon is Australia's biggest energy project. But it is not one punters will probably make much money on. The big companies involved in the project have massive global exploration and production portfolios. As big as Gorgon is-and as important as the off-take agreements are to firms in Asia-Aussie punters ought to look at the three or four other prospective LNG producing regions in Australia.
This is what your editor and Kris Sayce have been up to for the better part of the last six months. Kris has cherry-picked the best plays from Queensland's unconventional LNG plays near Gladstone in the Australian Small Cap Investigator. Over at Diggers and Drillers, your editor has looked at other unconventional gas plays, mostly natural gas trapped in sandstone formations in certain basins around Australia (so-called 'tight gas.')
Who knows which projects will end up prospering? No one yet! Already, some of the stocks are prospering on the speculation. Investors know that energy is Australia's most valuable long-term commodity export. The smaller players in the market are already pricing that development in.
We still have a few energy-related projects to add to our resource shopping list. We don't think we'll find them at Costco. But maybe we will finally find some Captain Crunch!
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.