IN REVOLUTIONARY France, war led to skyrocketing inflation and the mob(or the “sans culottes”, French for “I don’t wear fancy pants”) demanded that politicians do something about it. After months of pressure and food riots, the French Parliament acted and imposed the Law of the Maximum.
The Law of the Maximum capped the price of a laundry list of goods deemed to be of “primary necessity” including “meat, butter, wine, beer, coal, salt, sugar, lead, steel, shoes, soap and tobacco.”
The economist Henry Bourne described the resulting catastrophe: “It wast he honest merchant who became the victim of the law … The common people complained that they were buying pear juice for wine, the oil of poppies for olive oil, ashes for pepper, and starch for sugar.”
The Labor Government now proposes to cap the price of coal and gas due to a war in Europe. So the same people who have been saying we need to move away from coal and gas, now want to pass laws to force people to sell coal and gas at a discount. It seems like the one thing that Anthony Albanese wants from Santa this Christmas is a lump of coal, at a knockdown price.
Labor has not explained how their price caps will work any better than the ruinous examples throughout history. The Energy Minister Chris Bowen was asked on Sky News this week why would a coal miner not just export the coal to the higher priced export market? He did not have an answer but responded that it was a “complicated issue” and alluded vaguely to government’s “various powers”.
Even if somehow Mr Bowen can use his powers, it is not clear how this coal price cap will help bring down the price of electricity. Asked in that same Sky News interview what percentage of coal used in our power stations is supplied through long term contracts, Chris Bowen did not have an answer. Alarm bells should ring when a Government Minister wants to tinker with industries they know nothing about.
Almost all coal fired power stations do not pay the higher prices for coal that we have seen emerge since the war in Ukraine because long term contracts are in place. Only one power station, Eraring in NSW, is materially exposed to the spot price of coal. So any coal price cap will not significantly bring down the price you pay for electricity.
In effect, price caps will be about as effective as urinating on a bushfire. It will do nothing to reduce the threat but instead will put at risk the instrument itself.
Price caps will not be innocuous. They will hurt the long term incentives to invest in more coal and gas supplies. And, it is only through increased supply that we will see lower electricity prices for the long term.
You can see this already happening. Over the past 12 months investment in coal mining has been just $6.5 billion. That is half the level of investment during the last mining boom and coal prices are even higher now than they were then. Indeed, this week mining investment across Australia slumped 5.1 per cent despite Australia’s terms of trade being at a higher level than the last mining boom.
The $6 billion question is why aren’t the higher coal and gas prices leading to greater investment?
The International Energy Agency looked at this recently and concluded that “The mismatch between coal prices and additional investment is in part a product of a financial and regulatory environment that has become increasingly restrictive towards further investment in coal supply.”
In other words, woke banks and red tape are choking economic opportunity. While the new Labor Government can not be blamed for the ESG virus that has infected our financial system, they have added more red tape.
The new Environment Minister, Tanya Plibersek, has stopped the approval of 18 coal and gas projects based on a request by the Environment Council of Central Queensland. This has led to one planned coal mine in Central Queensland being shelved.
The revolutionary French government’s attempt to cap prices was such a disaster it lasted just over a year. A French politician speaking in favour of the return of the free market said “I know that when the government attempts to regulate everything, all is lost”. Or in the words of another famous saying, “those who forget history are condemned to repeat it”.
