American Gas

Fracking has become something of a bogeyman in Australia, which is interesting, because Australia has made a sizeable share of its national income from energy and it is fracking which is going to cost us and dearly. The problem isn’t solely that we are doubtful about fracking, with many believing it could damage the water table and destroy agriculture although clearly Australia’s dislike of fracking will cost us. The real issue is across the Pacific in America and Canada. Fracking has led to a remarkable increase in gas production in the US. In 2008 alone there was a 71 percent increase in gas production in the US and the following year an increase of over 50 percent. This simply enormous increase in domestic gas production in the US will have several long term consequences, not just for the Americans but for all of us. Let’s look at it from a selfish Australian point of view. The supply of energy globally is increasing substantially and that is going to have a negative impact on energy prices. For most people that’s good news. But for our coal producers as well as natural gas industry it could very well mean lower prices and lower returns. Already we’ve seen a dramatic fall in coal prices. They’ve dropped by about one third over the last five years. Secondly, the Obama administration has begun to approve the export of LNG from the US. They say exports will favour allies and countries with which America has trade agreements. One country in particular is a target for American gas exports: Japan. And Japan is one of our most treasured gas markets so expect some new and tough competition from Uncle Sam in that market. No doubt the Americans will favour markets like Taiwan as well, another of our important markets. So for the Australian government and our energy exporters, the next few years promise to be challenging. At the moment we are the world’s largest coal exporter and the fourth largest exporter of LNG. We’ve been doing great business in energy markets but that boom looks as though it’s over. For the Americans, the domestic gas boom is already having a positive impact on the local economy. Manufacturers, particularly of chemicals, have suddenly discovered a source of cheap energy. Profits are up, investment in some manufacturing sectors is starting to grow again and jobs are being created. Needless to say, American industry is arguing that US sourced gas should be priced at below world parity prices to give home grown industries a competitive edge. In Australia, we are loading up our energy costs through the carbon tax, the 20 percent renewable energy target and by limiting fracking – Victoria has a moratorium on fracking. We’re doing this, as you know, as a contribution to combatting global warming and preserving the environment. There’s an issue here. For a start, we produce less than 1.5 percent of global man made CO2 emissions. America produces 18 percent, so what it does really matter; what we do doesn’t matter much at all. And what America has done as a result of fracking and replacing coal with cheap domestic gas is to reduce its CO2 emissions to below the levels they were in 1994. That’s an incredible statistic. US CO2 emissions reached their record high in 2005 and have fallen by 12 percent since then. These days, 30 percent of America’s electricity is generated by natural gas compared with 16 percent in 2000. It’s cleaner and it’s cheaper than coal – at least for them. The gas revolution in the US also has important strategic implications for the world. The Americans are becoming less dependent on imported energy, in particular hydrocarbons from the Middle East. Some analysts have argued this will lead to greater US disengagement from the Middle East and a deeper engagement with Asia – where the markets are. This is simplistic but it may have an element of truth. For a start, America is not going to turn its back on Israel. That locks it into the difficult architecture of the Middle East. And secondly, the Americans won’t abandon their other key ally in the region – Saudi Arabia. Although the Americans may have less need for Saudi oil, that isn’t true of America’s European allies – or Japan. And to abandon Saudi Arabia would risk allowing deeply hostile Iran to dominate the politics of the Middle East. And it isn’t just hostile to the West; Iran is also inherently sectarian promoting tensions between Shia and Sunni Muslims. But having said that, the Obama administration is loathe to get too heavily engaged with Syria’s civil war and nor did it play a leading role in oil rich Libya. So there it is; the world is changing perhaps to our disadvantage because of fracking in America. It will be an education to see whether the Australian government after the general election in September has some answer to this challenge.