Australia is the energy superidiot. It is engaged in the most disastrous transition from fossil fuels to renewable energy on earth.
The problem is very simple.
The plan was to use Australia’s abundant and cheap gas reserves to replace coal as backup firming power for intermittent renewables.
However, a vicious gas export cartel rose to dominate East Coast gas reserves and imposed an artificial gas shortage.
The resulting extortionate prices and insecurity of supply rendered investment in gas power plants untenable.
Now, we have a full-throated push towards intermittent renewables combined with stranded coal power stations and declining surge capacity without gas peakers.
Since 2017, it has been a national emergency, but little has been done, so we now have rolling energy shocks instead.
So much for a bleak history. What of the future?
Australian politics is paralysed on the issue. The debate is dominated by pro-fossil fuels versus pro-renewables polarities. The answer is, of course, both.
In the absence of a political solution, the market is moving to profit from the power vacuum.
Twiggy Forrest’s Squadron Energy will complete an LNG import terminal in NSW next winter to backfill the gas shortage. Another terminal is proposed for Geelong.
But international LNG prices are still 50% higher than Australian. A forecast cold European winter will mean that high global prices will persist through 2025.
As imported LNG flows into the East Coast, the gas export cartel will respond by further restricting local supply.
It will do this to ensure that imported LNG (plus a margin) becomes the marginal price setter of local gas.
Australia will do better when international prices are below what the gas export cartel price would have been.
This may happen for a few years after 2028, when the big US and Qatari export expansions are on stream.
But for the most part, and before then, it will mean higher prices for local gas.
Notably, we’ll be paying for US dollar-denominated gas from Asia using Australian dollars, which puts us permanently behind the eight ball.
This is the mother of all bad ideas because it means we’ll get a new energy shock every time the Australian dollar falls, which is usually when the economy is already weak.
A version of this has already played out this year as the Ukraine War profiteering of the gas export cartel prevented the RBA from cutting interest rates.
If current international prices persist, it will get much worse when LNG imports begin. Indeed, the outlines of a crisis for 2026/27 are already apparent.
As China slows and the Simandou iron ore mine opens in late 2025, iron ore prices will crash in 2026/27.
This will deliver a national income shock, all but destroy Fortescue Metals Group, and smash the Australian dollar.
That falling dollar will deliver another energy shock in the east via LNG imports.
As utility bills skyrocket and budget revenues collapse with iron ore, the energy rebates so far used to offset spiking bills will become more difficult.
This will intensify a paralysis in monetary policy as energy inflation surges and the Australian dollar keeps falling.
In the worst-case scenario, fiscal and monetary policies plus currency will be in a simultaneous inflationary crisis.
House prices will tumble as energy shocks slam into rate hikes, banks will go bust just as the budget can’t help them, and the modern Australian economy will be brought to its knees.
In effect, Twiggy’s LNG imports are a put option on the East Coast economy to protect himself when iron ore collapses.
The gas cartel more broadly is shorting you.
