The Australian comments on the impact the massive discoveries of shale oil and natural gas in the US coupled with crude oil exports from Iraq will have on the economy of the land Downunder.

 

US shale and Iraqi oil are changing the energy game

APART from Tony Abbott and Joe Hockey, almost everyone is going around congratulating Wayne Swan on forgetting about the surplus.

But as a nation, we are forgetting why Swan is under so much pressure. The short-term back-slapping conceals a situation that has great long-term danger.

For almost a decade, both sides of politics have been spending the proceeds of the mineral boom as though it was a permanent change. The Treasurer took the process much further than Peter Costello but this was a policy that had underlying support from both parties.

We all thought that we were safe as long as China maintained momentum and we concluded that China had to maintain momentum or it would suffer severe social consequences.

We are now seeing China move forward again and so we feel good and markets are rising. Nevertheless there are underlying problems with China, but we will leave them for another day.

The medium-term threat to Australia is not China or even Europe (unless there is a meltdown), but rather comes from the US and the Middle East. The mining boom was about two export products: iron ore and energy (gas and coal). Iron ore’s supply has not ballooned and its outlook remains tied to the old China-based paradigm. No need for alarm at this stage.

But the energy scene is totally different. After a few disappointing wells, Saudi hit oil in 1938 and the discovery changed the postwar world. Now in the space of little more than two years we have effectively made two Saudi discoveries: one in the US via shale and the other in Iraq (George Bush was told big oil was in Iraq).

Leaving aside where these two huge new sources of global energy will be marketed, the energy glut they will create is going to affect the price of our gas and thermal coal exports.

This is a view that not everyone agrees with and I accept I could be wrong. I will certainly be wrong if there is an extended Middle Eastern war, which slashes supplies. But I have never seen any material able to hold peak prices when subjected to such a supply increase.

If I am right, then whoever wins the 2013 election will face a decline in tax revenues much greater than that experienced in 2012-13. They will have to cut expenditure that was built up by both parties on the basis of the boom.

We will look back on the abandonment of the surplus in 2012-13 not as a back-slapping event but as a forerunner of events to come which we did not understand in 2012.

And if it happens, the dollar will fall a long way, which is why it is so important to keep intact industries like automotive, which will become vital as the effects of the energy surplus hit our economy and our dollar. None of this will happen in the next 12 months. I hope I am wrong for in the long run, too.

Robert Gottliebsen is a commentator for Business Spectator. For more, visit www.businessspectator.com.au

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