We need price caps on gas. Otherwise property could end up as collateral damage.
Yesterday I noted that electricity prices are the black swan for property in 2023, and somebody wanted to know what I meant by that.
Well, unless you’ve been living under a rock, you’ll know that the war in Ukraine has caused a surge in energy prices, particularly gas.
That’s feeding through into electricity prices. Electricity prices are expected to be up 20% this financial year, and then 20% again the next.
Ouch!
The rub is that this feeds through to inflation. Since energy is a cornerstone commodity, it gets into everything. Some analysis I’ve seen says that this should add 300-400 basis points to inflation.
So if the RBA is targeting 2-3%, it needs the rest of the basket of goods to be deflating to the tune of at least 1%.
That’s not going to happen, so inflation will remain too high for too long.
And so what will the RBA do?
What the RBA has to do… keep rates high. It will have to stomp on the rest of the economy to stop energy inflation becoming a cancer.
That could mean higher interest rates, and as a result, falling property prices.
The great tragedy in all this is that we’re drowning in gas and energy resources. We’re the second biggest exporter in the world.
But because we export all our gas, we pay global (=war profiteering) prices.
The exception is WA. They have a domestic reservation that holds 15% of all production for the domestic market.
The result? Well, where the east coast is expecting electricity prices to go up 40%, Mark McGowan reckons electricity prices in WA next year will go up 2-3%.
(That’s great for them. But too bad they’ll be dealing with an interest rate setting calibrated for an east coast electricity market that’s jumped the shark.)
And why don’t we have a scheme like WA’s in the rest of the country?
There’s no good reason. And yes, I’ve looked. There’s no good reason. The gas producers want to say that it will stymie investment or create sovereign risk or blah blah blah give me my blood money.
It’s not true.
The fact that Mid-Ocean is willing to pay $18bn for Origin Energy right now, all while expecting the government to introduce some kind of price control tells you that it’s all self-interested non-sense.
But hopefully we’re going to see some action on this today.
The Labor government is set to announce some kind of price-cap today – about 6 months later than the rest of the world, but better late than never.
It looks like they’ll set the cap at around $12 a gigajoule.
That’s still 3 times what the gas producers were getting before the war, so don’t believe them when they start crying crocodile tears about it.
But it’s a lot less than the $35/gj that Origin was charging some of its manufacturing customers!
It could have been lower. It should have been lower.
But it should still be enough to protect us from the war-profiteering of our ‘gas champions’.
And with that, it should be enough to stop the RBA from hiking rates…
… and chopping the legs off the property market just as its getting up off the floor.
Bring it on Albo. Get it done!
JG.
Gabru says
Amen
Rani says
Good 😊