Why Natural Gas Restrictions Will Send Us Back to the Dark Ages

Oil production and the pipe
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Chugging down a warm cup of English breakfast tea, today’s Daily Reckoning begins where yesterday’s left off. Is all this worry about a crashing iron ore price and a housing bubble a storm in a tea cup? Worse, is it the sign of a compulsive worrier and a diseased mind? Let’s discuss.

First, a free piece of advice. If you ever meet an analyst who tells you that Australian stocks went up because the HSBC ‘flash’ purchasing manager’s index (PMI) from China was up, poke him gently in the eye and run away as fast as you can. He’s either a nincompoop or a well-meaning idiot. Probably both!

For what it’s worth, the HSBC ‘flash’ PMI was indeed up in August, from 50.2 to 50.5. But you can’t really argue that had anything to do with the stock market’s 1% rise yesterday. Well, you could argue it. But it would be a fruitless, reactionary point to make, the kind of point a monkey might make if you dressed it up in a suit, taught it to manage money, and gave it a day job.

The real news that affects the ability of Aussie companies to generate future cash flows is not good. A month-over-month survey of Chinese manufacturing is not going to change the momentum of the mining cycle. That momentum is toward rationalisation and consolidation. Hence BHP eliminating 700 coking coal jobs from its mines in Queensland.

It’s been my contention that the end of the mining boom will lead to higher unemployment in Australia. Higher unemployment leads to lower incomes. Lower incomes lead to lower consumption. Lower consumption and the end of the mining boom lead to a recession. Later today, the Reserve Bank of Australia will release its semi-annual Financial Stability Review. I’ll have a gander and report back on whether they’ve cottoned on to the economic reality facing the country.

In the meantime, take a look at the picture below. It comes from the government’s newly released Energy White Paper, Green Paper 2014, to inform preparation of a White Paper. If you sense confusion, you’re not alone. I’ll clear it up shortly. But first, this picture.



Economics in one picture. That’s what you see above. Demand for East Coast gas is about to spike. LNG projects in Queensland will begin shipping gas from the Surat and Bowen Basins to customers in North Asia later this year. Domestic users of gas will either have to pay a higher price or miss out altogether.

Politicians in Victoria and New South Wales have proposed a time-tested and ignorant solution: make a law that says the gas has to be reserved for domestic users. Producers could, and will, sell their gas at a higher price to foreign buyers, unless the government steps in. Economists call that stepping in ‘manipulating price signals’.

If the gas price is high because demand is up, it’s a signal to producers to produce more. Only in New South Wales and Victoria, they can’t produce more. They can’t even produce conventional natural gas in the way it’s been produced for decades. State governments, in abject fear of the scare campaign by environmental groups, have imposed a rolling, semi-permanent moratorium on on-shore gas exploration and production.

It’s hard to find and produce new energy supplies when you’re not even allowed to look for them. And so the great East Coast Energy Crisis of 2015 becomes even more inevitable. Don’t say we didn’t warn you. Meanwhile, both myself and Kris Sayce think the unconventional gas producers in the Cooper Basin may be the big winners from the politically self-inflicted upcoming Australian energy crisis.

But wait! Am I on the wrong side of history and social progress in this debate?! A craven, profit-seeking, environment-destroying interloper from America? Isn’t the tide turning in favour of renewable energy?

Earlier this week, The Wall Street Journal reported that the Rockefeller Brothers Fund, an $860 million charitable trust set up by the Rockefeller family in 1940, will reduce its investments in coal and tar sands projects to less than 1% of its portfolio. It also aims to divest itself of any company that produces or distributes fossil fuels.

The irony, of course, is that John D Rockefeller founded Standard Oil in 1870 and made the family fortune from fossil fuels. One way of interpreting this week’s move is that it’s the end of an era for fossil fuels. Another way of interpreting it is that it’s the beginning of an era for really poor investment returns from the Rockefeller Brothers Fund.

The anti-fossil fuel lobby makes the mistake of believing it can know the future. Rockefeller’s own case proves otherwise. When he started a business to refine oil in the 19th century, it was to produce kerosene for lamps. Before Edison and Westinghouse figured out how to safely generate and distribute electricity, streets and households were illuminated by ‘town gas’ and kerosene lanterns.

Electricity nearly put Rockefeller out of business. What saved him, and created the family fortune, was the mass production of the automobile. Henry Ford’s assembly lines cranked out cars fast enough and cheaply enough that Ford’s own workers, and millions of other Americans, could afford them. The popularity of the automobile created the demand for petrol.

Rockefeller never saw that coming. But when the opportunity came, he took his chances. The most successful energy entrepreneurs of the future will do the same. They won’t rely on the government jacking up the price of fossil fuels to make alternative fuels ‘competitive’. All that does is raise energy prices for everyone, reduce economic growth, and make the world poorer, colder, and darker. A world in which everyone must depend on the government may be the real agenda of the folks creating energy policy for the Greens.

Regards,

Dan Denning+
For The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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1 Comment on "Why Natural Gas Restrictions Will Send Us Back to the Dark Ages"

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toenee
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While your article makes some sense, if our QLD Govt. were to impose a domestic reservation system on gas, this would not stifle exploration or production (as minister McArdle Qld LNP)has suggested to me, because of what you have mentioned here! Due to the massive Asian market and now the NSW & VIC shortages, Companies such as Origin etc. will continue to profit from continued production driven by the abovementioned thus will continue to explore and extract. A gas reserve policy would only relate to a minority of the demand while the majority would still be creating huge profit from… Read more »
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