Monday, June 25, 2012

How big is Australia's LNG boom?

Big enough to inflame economic growth, big enough to inflame interest rates:

Australia’s natural gas boom threatens to set off a new round of interest rate hikes, pushing economic growth above the level with which the Reserve Bank is comfortable.

An analysis commissioned by the industry itself finds that by 2016 LNG investment will add 2.2 per cent to GDP growth.

Written by Deloitte Access for the Australian Petroleum Production & Exploration Association the study says over the next few years substantial additions to capacity will propel Australia towards becoming the world’s second largest exporter of liquefied natural gas. Of the 14 gas liquefaction plants under construction or firmly committed around the world, eight are in Australia. If all the planned oil and gas investments come to pass, they will comprise over 64 per cent of all Australian investment.

At present amounting to 2 per cent of Australia’s gross domestic product, by 2020 when production and prices peak, oil and gas should be worth 3.5 per cent of the economy.

Capital expenditure is expected to average $23 billion in capital outlays per year until 2017. Output of oil and gas is expected to peak at $46 billion in 2020...

The report says as a result Australia’s GDP should increase “significantly above the reference case”.

By 2016 GDP is expected to be 2.2 per cent higher than it otherwise would have been.

The finding implies pressure to push growth up from its long-term average of around 3.25 per cent to near 5.45 per cent, well above the level with which the Reserve Bank is traditionally comfortable.

The report says the boom will depress the economies of two states, NSW and Tasmania, while dramatically boosting those of Western Australia and Queensland.

“This suggests resources and activity are being reallocated from those states to the resource intensive states,” it says. “This occurs as part of the broader and national welfare-enhancing structural adjustments needed to capitalise on the resources boom.”

The report warns against direct measures to assist industries suffering as a result of the adjustment saying “any new policy rigidities or constraints such as explicit industry protection measures, mandated local content requirements, onerous project approvals frameworks and additional fiscal imposts will ultimately sacrifice economic welfare and intensify adjustment pressure on other sectors”.

Mandating that some of the gas be used in Australia would reduce financial returns, essentially acting “as a subsidy to other industries and a tax on developing gas reserves”.

“Many of the current calls for continuation and extension of the reservation scheme appear to have a legacy element. A form of domestic gas commitment was a feature of the State Agreement which covered the North West Shelf Project,” the report says.

“If subsidy arrangements are longstanding, they can become deeply entrenched. This stands as a key risk associated with any broader application of a domestic gas reservation scheme on the east coast. Like other forms of industry assistance, once such a policy is in place, it can be very difficult to unwind, whatever its merits or demerits.”

In today's Sydney Morning Herald and Age

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