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The best way to help Australian manufacturing? Stop exporting gas

While it might seem heretical to suggest we stop exporting gas, it’s important to remember that we only started exporting gas from Australia’s east coast in 2015. But since that fateful day, the wholesale price of gas has risen from around $3 to $4 per gigajoule in 2013 to around $10 last year. The impact of these higher prices has been devastating for some manufacturers.

It gets worse. The resources industry loves to talk about what great exporters they are, but they are strategically silent on the flipside of that same coin. To put it simply, the more resources Australia exports, the higher our exchange rate gets, and the higher the exchange rate the less competitive our manufacturing industry is. The recent surge in iron ore prices, for example, which made Twiggy and Gina so much money last year, had a direct and significant impact on the competitiveness of our other exporters.

The idea that the more natural resources a country exports means less manufactured stuff it exports is hardly a new or radical idea, indeed it’s called Dutch disease because it is precisely what happened in the Netherlands after they found oil and gas in the North Sea. As that well-known lefty Alan Greenspan, the former chair of the US Federal Reserve says, “paradoxically, most analysts conclude that, particularly in developing countries, natural resource bonanzas tend to reduce rather than enhance living standards …[It] takes the form of an economic affliction nicknamed the ‘Dutch disease’. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country’s currency.”

Usually countries that discover new supplies of a resource at least benefit from a fall in the price of that resource, but thanks to the idiosyncrasies of the Australian gas market, the boom in gas production has actually resulted in a surge in the domestic price of gas. Talk about lose-lose.

While it seems counterintuitive that a big increase in the supply of gas has seen an increase in domestic gas prices, the explanation isn’t complicated. Economists have a wonderfully confusing phrase to conceal the consequences of their most important assumption. They use the Latin phrase ceteris paribus instead of its English translation “all other things remaining equal” for the simple reason that everyone knows all things are rarely equal. And so it is with the gas market.

It is true that the supply of gas has trebled since 2015, and it is also true that if all else had remained equal, such an enormous surge in the supply of gas would have led to a drop in the price of gas. But, as is usually the case, all else hasn’t remained equal. Read from source….