The Cost of Energy and other things...

We are all getting nicely distracted by debate over the Carbon Tax but let's talk about something far more important. Firstly, some facts:

- The majority of the world's developed economies are either in recession or teetering on it.
- Yet the price of oil is currently over $100USD/ barrel. Apart from a brief sojourn in that range a year ago, it hasn't been so high since before the GFC, to which it is widely believed to have been a major contributor / trigger.
- The price of new gas in volume on the west coast of Australia is now well over $10/GJ, up from a fifth of that amount 10 years ago. People are talking about parity with liquids.
- The east coast price of gas is heading in the same direction with the Gladstone terminals dragging the domestic price up to international parity (which is why they are being built). Large amounts of the new supply that has been mooted need that price to be brought to the market. We are eating through the lower cost stuff pretty quickly.
- The price of newly contracted thermal (energy) coal on the east coast of Australia is now over $100USD/tonne, up from a fifth of that amount less than a decade ago.
- It is likely that new coal supply on the west coast would be in a similar range.
- There is a massive catch up of investment required in electricity networks across all mainland states of Australia following decades of under investment following de-regulation. This has only just commenced and is the major contributor to higher electricity prices already.
- As for the price trajectory of mining commodities, well we all know about that. This makes the cost of new power and energy infrastructure that much more expensive to build, due to the higher costs of steel, concrete, etc etc etc.
- Not to mention the price of food commodities is now also testing new highs globally since the GFC - e.g. the price of soyabeans more than double 2006 levels.

That'll do for now. Am I the only one concerned about all this? Relatively small movements in these prices make the impact of the Carbon Tax look puny. And yet this is all happening while the world is still in the grip of the "Great Recession". What happens to energy / food prices if we somehow stage a recovery? We have inflationary pressures from massive money supply stimulus as well as high energy prices in the face of effectively zero (being kind) economic growth globally in the developed economies - not a good look.

It's hard for me to see a way out of the global economic situation while the drag of massive govt debt and high energy / commodity prices is so strong. This drag could last for well over a decade or more from where I sit and there are no cheap sources of energy to turn to - renewables, nuclear etc are all more expensive than the status quo although the gap is closing fast and almost breached in some locations. The amount of concrete and steel required for new nuclear build means that it is likely to continue to be an expensive option well into the future.

Sure Australia gets some upside through commodity prices for export, our economy is still growing well and I'm certainly not saying "don't buy property". I guess what I am saying is that cash flow will remain king for me for some time to come - speculative capital growth in property in the face of these facts still looks very risky... even if some get excited about interest rate drops.

Thoughts anyone?
 
- There is a massive catch up of investment required in electricity networks across all mainland states of Australia following decades of under investment following de-regulation. This has only just commenced and is the major contributor to higher electricity prices already...

Thoughts anyone?

But that is Australian business mentality. Put in as little money as possible because they are lazy to innovate new ways of making money. They just go to the default position of raising prices because it is easy.
 
Given (unforseen) family circumstances lately, for my family, cashflow is indeed king. Thank goodness.

You're definitely not alone there OO. I might end up working for a living again from next week - after 6 months off. Not something I could have done without cash-flow...

While I hadn't read that particular report I am well aware of its theme. Any historical analysis would demonstrate we are paying less for energy (for example) now in real terms than say the 70s (post oil shock) or 80s. But our standard of living was much lower back then. Transitioning back to real prices anywhere near that proportion of household income would be a very painful process... going the other way of course is a nice ride!

The problem for me is the trajectory as much as the actual amount. In the electricity industry, we have:
- Used up spare capacity in the wires ever more imaginatively until now there is none left. The only way to keep up with demand now is spending real money on new bulky power infrastructure. We have used all the over-engineering of previous generations and squeezed the last drop out of the lines - there's no more where that came from.
- At the same time, a heap of existing infrastructure - poles / wires / substations built back in the 60s and 70s is reaching the end of its life. While there were fears we would have to build a "wall of wire" from the ground up in a short space of time, the band-aids and patch-ups have kept us ticking along until now. That is unsustainable though - at some point you have to replace old power infrastructure - everything has a working life.
- Ran old power stations into the ground, patched them up, kicked them along and resurrected them from the dead - there are power stations operating today that are 10 years older than their design life. Just kicking the can down the road. Soon we are going to have to build new ones again but all the new ones will run on gas... which leaves us rather exposed from my previous post. The price of new coal stations is not particularly cheap anyway - it's the fully depreciated existing stations that are cheap, which is why they keep getting patched up.

So we have inevitable price pressures and a trajectory of capital investment that will require increasing revenue to pay off. On top of fuel price issues as I alluded to. The honeymoon is over...

I'm just a little worried about all these issues coming together at once - it makes the Carbon Tax look inconsequential and yet it gets little to no oxygen in public debate by comparison.
 
But that is Australian business mentality. Put in as little money as possible because they are lazy to innovate new ways of making money. They just go to the default position of raising prices because it is easy.

I think it is the default Australian mentality.

We don't like spending money on infrastructure or research and development either.

It's pretty pathetic really.
 
Terrific posts, HiEquity. Kudos. The carbon tax / ETS is clearly a political red herring when compared to costs of updating our collapsing energy infrastructure. To address those, I think we clearly need a serious MRRT combined with the best PPPs ever designed. That is, we need major public money involved to keep the cost of energy down for consumers, and we need major private enterprise involved to maximise the bang for our buck. Obviously, this will take visionary national political leadership and the best management business can possibly offer, and it will be needed all too soon. I know I won't be holding my breath.
 
For anyone interested in what is happening with global food prices, this link is instructive.


The raw price of food mainly effects poor people in third world countries. It has little relevance to developed nations other than giving retailers an excuse to hike prices. And this is exactly what the article says too.

There is about 15 cents worth of wheat in a loaf of bread. Add a bit of milk and salt and sugar and other stuff and it would be lucky to be 20 cents worth. Rising food prices in developed western nations is 90% in the processing and retail. If the price of the raw ingredients doubles, the end effect is tiny.

Not so if your an egyptian, buying bags of wheat and rice for your family to eat. If the price of raw food doubles, the cost of food for them doubles of course.


See ya's.
 
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