Should Australia Have a Shortage of Natural Gas or Cash?

The Americans continue to play silly buggers over their budget. It’s fantastic stuff to watch. Especially if you’re a ‘Deal or No Deal?’ fan, unlike us. Last night’s episode ended with ‘No Deal!’

Stocks dropped, gold plopped and bonds face planted. One bank after another is dumping bonds that pay interest or mature over the coming months. Last night it was Citigroup.

One interesting tid-bit of news on this topic is that commentator Marc Faber reckons, if push comes to shove, rather than balancing their budget by cutting spending, the politicians will ask the Federal Reserve to buy bonds directly from the government. That’s called ‘monetisation’ Weimar Republic style. It would break the 1913 law that created the Federal Reserve in the first place, but heck, when you make the laws, breaking laws isn’t a problem.

Sick of the American shutdown story? On to something new then. Fair warning though, the rest of this Markets and Money is going to be mighty unpopular. Even more so than yesterday’s housing bubble analysis. It’s all about the hidden opportunity in this image:

click to enlarge
Source: 5 Minute Forecast

If you can buy something for $3.15 in America and sell it for $16.40 in Mexico, should you? Not if you’re a patriotic Australian, as you’ll discover below.

Oddly enough, Australia is at the centre of the story the image is trying to tell, but we don’t even get a price label. Maybe that’s because there are some foul smelling goings on within our borders. We’re talking about the natural gas industry, of course.

‘Rip and reap, baby’ is for the wimpy resource cowboys of the past, reports The Age. ‘Rip, reap, hoard and flog overseas’ is the new motto of the Australian gas industry. And they’re infuriating the greenies, industry, politicians and every other busybody in the country. So, as a matter of principle, let’s give the scroungedrels some support.

Why are they ‘scroungedrels’? Well, instead of providing much needed cheap natural gas to Australian homes and industry, the scoundrels are scrounging around for higher prices overseas. Despite having one of the largest gas production booms in the country, Australia could end up with a shortage of natural gas!

That’s a bit misleading. The correct way of putting it is that local consumers of gas are being outbid by foreigners. We’re not willing to pay the international market price. But for the sake of the journalists who have to write about this stuff, let’s call it a gas ‘shortage’.

More and more gas export terminals are coming online, but not fast enough for the natural gas producers. Now the villains have gone one worse than just selling Australia’s valuable and needed resources overseas for a higher price. [Gasp!] They’re hoarding and storing natural gas in anticipation of being able to sell it overseas at a higher price. [Outraged gasp!] And that’s driving up the price of natural gas here in the meantime. [Bang fist on table.] There’s nothing worse than a hoarding scroungedrel, is there? [Shake head.]

Actually, things are just as they should be. For now anyway. Politicians and lobbyists are already on the move to ‘fix’ the ‘problem’. As always, they’re being egged on by big business trying to get some protection from international competition. BlueScope Chief Paul O’Malley pointed out that Australia is the only country in the world that exports gas without having a national gas policy.

Maybe it’s not a coincidence we’re in the middle of a gas boom then. But try substituting ‘gas’ for something else like ‘cabbage’. ‘Australia is the only country in the world that exports cabbage without having a national cabbage policy.’ Ridiculous, right?

Not so according to some. Mike Lauer, director of Gas Trading Australia, told the Australian Pipeline Industry Association on Monday that Australia has a serious cabbage misallocation problem, quoted in The Age:

”’On face value, it would be hard to find a better example of gross resource misallocation.”

‘His comments came as pipeline owner and operator Jemena said government must be prepared to intervene to prevent ”demand destruction” among some [cabbage] users when the [cabbage] price spikes, which would put trade-exposed industries that use large volumes of [cabbage] at risk.

”’Temporary, targeted government assistance for trade-exposed industries would be justified to ease transitional pressures,” said Shaun Reardon, Jemena’s executive director.

Now Greg Canavan tried to convince us that natural gas is a little more strategically important than cabbage. But he’s wrong. Europe has a real cabbage policy. It’s more than 29,000 words long.

Australian Industry Minister Ian Macfarlane pointed out that. ‘All gas rich nations globally reserve gas for domestic value adding industries as well as having gas for export.‘ But policies are pointless. They just hinder the free market from allocating resources to the most efficient user. Here’s what long time gas investor Dan Denning wrote in yesterday’s Scoops Lane:

Here’s a suggestion: why don’t the State governments quit cowering before the exaggerations and hyperbole of the Green lobby and get on with allowing exploration and development of on-shore unconventional gas resources? Surely more supply is the answer to high prices, not an artificial reserve held back from export.

He’s completely wrong of course. It’s the other way around. High prices are the answer if you want more supply. And that’s why all this hoarding is fair enough.

To be fair, Dan was referring to an artificial reserve of natural gas held back for Aussie business by the government in one of their crazy schemes in the works. That would be a bad idea. But what about the hoarding going on in the private sector?

First of all, hoarding in anticipation of future use is a signal to the economy that a lot of gas will be needed soon, so production needs to be ramped up. Nothing ramps up production like higher prices, and that’s just what hoarding causes. So hoarders are actually quite helpful. They also stabilise prices when they sell their amassed holdings. And prepare the rest of the economy for the coming higher prices.

Secondly, selling your exports overseas for multiple times their local price generates a greater benefit than cheap natural gas would here. It’s just that the dollars flow into different hands. So the real question should be how Aussie investors can get their hands on the Aussie companies that will be making a mint.

If you disagree with that, pick up any economics textbook and look up ‘comparative advantage’. It’s probably in the second chapter, right after ‘supply and demand’. The general idea is that if you specialise in doing what you do best (produce cheapest), and then trade with others, you benefit.

Put it another way. Would you rather have a ‘shortage’ of gas, or cash?

But what about poor old Aussie industry, which will have to put up with soaring gas prices? Well, what makes them more important than natural gas companies? If Aussie industries gets to sell their goods and services at international prices, why shouldn’t gas companies?

Our friend at high school had all this figured out long ago. His family lived next to a disused airport and they filled up the petrol storage tanks whenever the price was low so they could use it up when the price was high.

What an evil scroungedrel!

If burying a gas tank in your back yard to hoard LNG isn’t for you, why not take a look at how Dan Denning has positioned his subscribers to profit from the boom? It’s one of the few bright spots in the Aussie economy, going by his other predictions.


Nick Hubble+
for Markets and Money

Read the rest of this article at Markets and Money

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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