Why is cheap domestic gas a bad policy choice?

 

This is a guest post by my old friend, Geoff Edwards. I refer to him as my old friend not because of his age (he is not much older than me) but because I have known him for a long time. Geoff was my supervisor when I began working in the Bureau of Agricultural Economics in Canberra in 1967, and found a way to give me some interesting research projects to work on. Several years later, Geoff left the Australian public service to pursue an economics career in academia.

The post has its origins in an email message that Geoff sent me a few days ago suggesting that the “east coast gas reservation” plan, recently announced by Peter Dutton, the Leader of the Opposition in the federal parliament, was bad policy. The plan seeks to reduce the domestic price of gas by delivering to the domestic market “an additional 10 to 20 per cent of the east coast’s demand – gas which would otherwise be exported for use in other markets for consumers in those countries.”

Since this proposal was announced at the beginning of the current Australian election campaign, I should make clear that while I agree with Geoff that Dutton’s gas plan is bad policy, I don’t consider Dutton’s Liberal Party to be a greater source of bad policies than any of the other political parties contesting this election. That explains why I have chosen the quote from The Wisdom of Henry Hazlitt to put at the top of this post.

Here is the guest post by Geoff Edwards:

Peter Dutton says his government would separate the domestic price of gas in eastern Australia from the export price.

For efficient resource use for tradeables, whether meat, steel or gas, prices within Australia need to be driven by prices in world markets.

That is fundamental to the liberal trading order long supported by Australia.

Seeking to make the price of gas used in Australia independent of the price in international trade is a policy of distorting the gas market and the broader economy.

Not efficient. Not liberal. Not smart.

High gas prices perform the valuable, albeit sometimes painful, role of discouraging use of environmentally-negative gas in electricity generation and directly.

And imagine the ammunition the domestic subsidy policy would provide to Australia's powerful friend in the US to expand trade restrictions.

In order to relieve pressures on households and small businesses without introducing damaging, incentive-destroying market distortions, cash payments targeted to those judged most in need would be a better way to go.

Geoff Edwards

Kew, Vic, 3101