Government must find a way to force gas prices down – but how?

Senior ministers this week have dramatically raised the stakes in the Albanese government’s face-off with gas producers, amid escalating energy prices and dire warnings of worse to come. The question now is how does the government follow through with effective action to match the rhetoric?

Bringing gas prices down in the eastern part of the country is vital in reducing the cost pressures many businesses and households are confronting. Coal and gas prices are the main drivers of soaring electricity bills.

Dealing with gas prices is also important for reinvigorating Australian manufacturing, one of Anthony Albanese’s promises at the election.

And, despite the opposition to gas from some environmental critics, it has a necessary role in the transition to a clean energy future and thus to the government being able to deliver on its ambitious climate policy.

Shaping up as an outspoken protagonist in the current “gas wars”, Industry Minister Ed Husic this week launched a barrage of criticism at the producers.

Husic accused the companies of acting in a way that “would make a locust swarm proud”, bent on an “absolutely rabid pursuit of profit above all else”.

They are “sucking up an Australian resource and selling it at phenomenal prices overseas and doing so in such a way that is putting pressure on manufacturers and households in this country,” he told Sky.

Husic is one of four federal ministers in the front line of trying to bring down local prices.

Treasurer Jim Chalmers highlighted the issue when he told a Tuesday news conference power prices were expected to play “a bigger and bigger part” in Australia’s inflation problem in coming months.

Chalmers said he, Husic, Resources Minister Madeleine King and Energy Minister Chris Bowen were working on what could be done to get gas prices down, declaring action would be taken.

But to what extent all four are on the same page is a moot point.

Traditionally, resources ministers are more sympathetic to producers and industry ministers speak up for the users.

Thus Martin Ferguson, when resources minister in the Rudd government, opposed a Queensland plan for a gas “reservation” scheme. (Ferguson, who went into the industry after retiring from parliament, later changed his mind.)

Such a scheme already operated in Western Australia. The WA policy requires LNG producers to reserve a certain proportion (15%) of their production for domestic use. The state is not part of the eastern states’ national energy market and has some of the lowest gas prices in the OECD.

One wrinkle in the present ministerial mix is that King is from WA. She is charged with trying to deal with a problem that her home state, thanks to its policy setting, doesn’t have.

King recently negotiated a new so-called “heads of agreement” with the gas producers. It was a light-touch deal.

The companies undertook to provide enough gas in the domestic market to avoid any supply problem.

But the rub is that the price at which they supply it won’t be lower than the international price. And that foreign price is very high and rising, driven by the energy crisis in Europe. The international parity price has risen from about $10 a gigajoule a year ago to about $60 for 2023.

The national secretary of the Australian Workers’ Union, Daniel Walton, this week was scathing about King’s “dud” agreement.

The government had a choice, Walton said. “Defend the insane super profits gas exporters are making from the Ukraine war or defend the future of Australian manufacturing and the hundreds of thousands of jobs it supports.”

The government has declined to pull the “trigger” that the Turnbull administration set up to give some potential control over gas supplies in the event of export demands leaving the local market short. The trigger has never been used.

This trigger allows a government to order the companies to set aside a certain amount of gas for domestic use. But it does not go to price, which is at the heart of the present problem.

The government’s challenge is how to separate the domestic market from the international price. But the options available to it are limited, and some involve hurdles too high to surmount.

It has a review of the trigger under way. The mechanism could be made more flexible and fit-for-purpose by removing the long lead time required to activate it and by extending it to include price.

Another course is to strengthen the “code of conduct” that regulates standards in the marketing of gas to industrial customers. Husic said the government would examine having price factored into that code.

The government has ultimate power in that it controls export licences, but to even contemplate using that threat against recalcitrants would send the worst of messages to investors.

A bold option that many experts and others advocate is introducing a super profits tax on the companies. An alternative would be to change the existing petroleum resource rent tax.

But they run into the same brick wall that suggestions of recalibrating the stage 3 tax cuts did – an election undertaking. The then opposition’s pre-election economic plan said “Labor is not proposing tax reforms beyond multinationals”. In recent days, Chalmers has firmly ruled out a super profits tax.

An amended code of conduct and an amended trigger would seem the easiest options. Whatever is done needs to be quick and effective, but there are difficulties and no guarantees. The issue also poses a test for maintaining discipline within the government, giving the contending ministerial views.

Husic said: “We cannot be more clear: if these gas companies think that this is the end of the story and the heads of agreement is all done and dusted, they’ve got another [think] coming”.

Strong words. It would be interesting to know what the companies will be saying to King and what King and Husic will be saying to each other as the government grapples with its next step.