Soaring gas prices in Australia fuelled by the emergence of LNG exports could have a bigger impact on trade exposed industries such as agriculture than the now repealed carbon tax would have, a new report suggests.
The report by Deloitte Access Economics was commissioned by a consortium of manufacturing industry associations in Australia.
It estimates how expected rises in gas prices as LNG export activity increases will impact economic output in three key trade exposed sectors in Australia – manufacturing, mining and agriculture.
The report found that the changes occurring in East and West Coast gas markets will cause both positive and negative impacts on the Australian economy.
“While the gas and construction sectors are expected to benefit from the development of a new East Coast LNG industry, almost all other sectors within Australia’s economy are likely to experience losses in income,” the report concludes.
“Greater input costs associated with higher gas prices and greater risk arising from a more difficult gas contracting environment will have adverse consequences for many regions and states.”
The report predicts that soaring gas prices will cause agriculture sector output to contract by more than 2pc or $4.5 billion over the next seven years, mining sector output to contract by $34b and manufacturing sector output to contract by $118b.
A chart compiled in response to the report by news service Business Spectator (click here to view) compares the expected impact that the now repealed carbon tax would have had on the manufacturing, mining and agriculture sectors over the next six years (quoting figures directly from the Federal Government’s Clean Energy Legislation (Carbon tax repeal) Bill 2013), with Deloitte’s estimates as to how rising gas prices as LNG exports ramp up will impact economic output in the same industries.
The comparison suggests that in all three cases, rising gas prices due to LNG exports will have a much greater impact on the output of all three industries than the Carbon Tax would have.
The Government’s regulatory impact statement suggested that had the carbon tax been left in place rather than repealed, agricultural output would have marginally increased by 0.4pc over the next six years.
However, the Deloitte report predicts that as gas prices rise, economic output in the agriculture sector will contract by more than 2pc as a direct result over the next seven years.
Explaining the impact on agriculture, the report says the large food, beverage, and grocery manufacturing industry has very limited ability to pass higher energy costs on to consumers, and consequently, the cost of higher gas prices will translate into a direct reduction in business profitability, which has the potential to reduce industry output.
“Given that the food, beverage and grocery manufacturing sector uses a significant proportion of output from the agriculture sector, its contraction will have a flow on negative impact on the agriculture sector,” the report said.
“This impact may appear underestimated in the modelling results because of the model’s assumption that agricultural output could easily be diverted to export, which may not be the case for small agricultural producers.”
Peak gas body says report strengthens case for less regulation
For its part the gas industry’s peak representative body APPEA (the Australian Petroleum Production and Exploration Association) says it has welcomed the Deloitte report, because it says it highlights the urgent need that exists to remove regulatory constraints on the industry to increase production and supply across Australia.
APPEA said the message from the gas customer groups which commissioned the report was that increasing natural gas supply and putting downward pressure on gas prices is critical to the competitiveness of manufacturing.
“APPEA has for some time been highlighting that state government restrictions on industry activity will impact on gas supplies. It is encouraging that customers now both recognise and are advocating for the removal of artificial supply restrictions,” an APPEA media release issued in response to the report states.
“APPEA is also very pleased that the report highlights the enormous economic benefit associated with the continued expansion of Australia’s from LNG industry. Australia currently has $200 billion worth of projects under construction and Australia is set to be the world’s biggest exporter of this cleaner burning fuel by 2018.
“The report finds gas production is one of the highest value adding industries in the Australian economy, which reflects the technologically sophisticated and innovative nature of natural gas production.
“The report says: “Given the high value-added contributions associated with the gas sector, summing the industry value added impacts for all sectors gives an overall net increase in GDP over the forecast period”.
“Australia has plenty of gas available for both domestic and export markets. By allowing market forces, rather than encouraging government intervention, to determine when and how Australia’s gas should be developed, these benefits can be realised to the benefit of all Australians.
“Rising prices do not equate to market failure, which is why other policy prescriptions contained in the report are unnecessary.
“Australian gas producers and customers have entered into at least sixteen gas supply agreements or other commercial arrangements across the eastern gas market since the end of 2012.
“The range and scale of these supply agreements suggest there is enough information available to allow supply contracts to be concluded between genuine buyers and sellers.
“In addition to removing restrictions on gas supply, the best policy response from governments to assist manufacturers under to pressure to respond to changing market conditions will be to focus on initiatives that boost productivity and encourage investment, including via lower tax burdens, efficient regulation, ongoing investment in skills, and greater labour market flexibility.
“This will give all companies – including those in the manufacturing sector – the best chance to adapt to structural pressures and increase their international competitiveness.”