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Foolish Labor policy on natural gas

The Labor Party propose restricting natural gas exports from Australia to ensure greater availability (and lower prices) for domestic gas supplies.  This is a poorly thought through policy proposal.

The basic economics of international trade suggest we will export goods we can produce more cheaply than those produced in our export markets.   Therefore, when we do export  goods, the price will rise for domestic consumers assuming that a single price is charged both domestically and internationally. Moreover, competitive, profit-maximizing firms seeking to optimize their returns will force a single price.  Thus, local consumers are worse off as a consequence of exporting.  This is not only so for natural gas but for other products we export – beef, wine, and many other products provide recent examples.

Economics 101 teaches that these losses are exceeded by the gains to local producers who naturally earn extra returns from being able to export at higher prices. This is the source of what economists call the “gains-from-trade” in exporting.  Our consumers are worse off but our producers get greater gains.  We pay more for our beef when we export it but gain more than we lose through the increased value of our exports.

An exception to this argument can arise if the companies doing the exporting are multinationals who can transfer price away the profits they earn so that Australia gets no gains net on the supplier side and loses on the demand side as well.  Several points here. (i) If multinationals cannot transfer price and face the same tax liability as local firms on the true profits they earn then there is no problem provided that, when if they purchased the Australian assets, they did so at their true value accounting for their future export potential.   Cutting back on transfer pricing options or using tax-raising measures such as output- or revenue-based taxes are ways of addressing the transfer pricing issue. These are “second-best” policies that come into their own because true profits cannot be readily identified. (ii) The core issue of foreign ownership of natural resources such as mineral deposits (and land) needs to be addressed if transfer pricing cannot be addressed.  If foreign multinationals will pay premium prices for Australian natural resource assets simply because they understand they will be able to secure extra profits from cheating the taxman then there may be a case for imposing controls on such purchases. (iii) In practice, for natural gas sales, it seems unlikely that the issue of transfer pricing cannot be addressed so that issues of immiserising foreign ownership become less urgent in this case.

Chris Bowen and his AWU mate, Scott McDine, who wrote the AFR article I link to, want to set up a regulatory agency to assess the case for gas exports on the basis of the “national interest”.  These weasel words should send shivers down the spine of every thinking Australian.  They will certain scare off investment in this currently troubled sector of the economy.  Firms such as Santos and Origin Energy (both dominantly Australian owned) are already facing real difficulties – indeed issues of corporate survival – recovering the billions they have invested in natural gas because of the recent decline in the prices of gas.  The proposed Labor policy will increase the real problems faced by such firms and again Australia would shoot itself in the foot were such policies to be introduced.

These authors claim that other countries (particularly the US) do not allow markets to determine gas prices and restrict supplies onto international markets.  Those policies benefit Australia by providing extra returns to Australian exporters because of these artificial restrictions.  But the general point here is that Bowen/McDine are restating the oldest argument in the world for protectionism – we should do it because others do so.  This is nonsense. If other countries seek to damage their national self-interest Australia need not follow suit.

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