BY BRIAN WAWN, PROJECT MONITOR

Andrew Liveris, an Australian, is the CEO of the global manufacturer, Dow Chemical.

He wants Australia to reserve a proportion of natural gas production for domestic manufacturers, reiterating this view most recently on Australian television on 2 December.

Some in Australia support Mr Liveris.

But his view should be ignored.

First, calls for natural gas reservation are effectively calls for subsidised prices for domestic users.

Domestic users will have no difficulty sourcing natural gas if they are prepared to pay export prices or higher.

But they naturally do not want to do this.

Better to oblige natural gas producers (such as Santos, BG, Origin Energy, ConocoPhillips, Woodside and Chevron) to sell natural gas to Dow Chemical and other users for prices that are effectively subsidised.

But what about Dow Chemical’s customers? If local manufacturing is to be encouraged, should not Dow Chemical offer its customers subsidised prices? And should not these customers offer their customers subsidised prices?

To require this would be absurd.

The only way to justify putting all the burden on natural-gas producers is to argue that the manufacturing sector is more important than the resources sector – and to protect it accordingly.

Such a policy in Australia was effectively discarded with the economic liberalisations implemented by the Hawke-Keating governments in the 1980s and early 1990s.

Since then, the economy has performed strongly, with robust growth, low unemployment and low inflation.

If Mr Liveris wants a special place for manufacturing, he should explain how this will improve Australia’s overall economic welfare.

Second, as pointed out by the Australian Petroleum Production & Exploration Association, “having laws dictate where and how gas can be sold invariably deters investment” (17 October 2012).

Concern about government direction of resources in this way is not simply an academic concern.

For example, in 1938, the Federal government imposed an embargo on iron-ore exports because of “serious doubts as to the adequacy of Australian iron-ore resources for Australia’s own need”.

South Australia was then the main source of Australia’s iron-ore. It remained so until 1960, when the embargo was lifted.

It was only after 1960 that investment in the Pilbara region of Western Australia took off, transforming the region into a global iron-ore force. 

Third, the United States is expected to start exporting liquefied natural gas in 2015, in the wake of the rapid development of shale gas there in the past 10 years.

This is expected to exert downward pressure on global natural-gas prices.

If this occurs, the argument for natural-gas reservation for domestic users in Australia will have even less basis than it does now.

And it may be natural-gas producers who look for protection, not natural-gas users.

In its Energy White Paper released on 8 November by the responsible minister, Martin Ferguson, the Australian government states that it “does not support calls for market interventions such as a reservation policy”.

The common sense of the government on this issue is welcome.