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It doesn't have to be this way: Australia's energy crisis, America's energy surplus

Energy consumption Energy resources Energy industries Energy security Electricity prices Australia United States of America

Australia and the United States have much in common: liberal, democratic institutions; technologically advanced, largely open economies; growing populations; demanding infrastructure; and above all, abundant energy resources.

But with respect to energy, Australia and the United States are on radically different paths. Australia faces an energy crisis, stressing households and businesses, but threatening the very existence of some of Australia’s large industrial users of energy. The United States is reaping the benefits of energy boom, delivering inexpensive gas and electricity, driving a renaissance in American manufacturing and economic growth. Specifically:

  • Australian households and businesses pay dramatically more for their energy than their American counterparts — two to three times as much in many cases.
  • American households and businesses are supplied energy with greater reliability and tariff transparency than in Australia.
  • Over the past decade, US carbon emissions from electricity generation have declined by more than twice the rate of Australia’s emissions decline.

Economic modelling in this report indicates what’s at stake. Because energy is a non-substitutable good, consumed by households and businesses alike, high energy costs reverberate through the entire economy. A 25 per cent increase in electricity generation prices and domestic gas prices costs more than 33,000 Australian jobs and 1.15 per cent of GDP. The modelling may underestimate the actual impact of significant price increases.

Recent media and political commentary focuses on energy costs for Australian households. But for a globalised economy like Australia’s — with relatively high labour costs — high energy costs pose an immediate and dire threat to businesses that consume large quantities of energy, with manufacturing, chemicals, and steel among the sectors at most risk. Investments in these sectors is unattractive absent certainty about the costs of energy. Case study evidence indicates that some firms will cease operations altogether if they cannot secure economically viable gas prices for 2019 and beyond.

A key lesson of the US energy revolution for Australia is that resource abundance will only get the economy so far. Increasing energy supply is not enough. Institutional arrangements and property rights, free markets, infrastructure development and regulatory and policy settings all play an important role. The architecture of Australian’s energy markets also require reform, if not transformation. Get the institutional and policy settings right, and the market will transform physical abundance into economic abundance and put downward pressure on energy prices and emissions.

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