Why Can't the Government Do This 1911

On Wed, 2 Aug 2006 15:10:21 +1000, "Peter Webb"

We might well be urbanised, but our industrial spread is clustered.Australia has quite a sophisticated and decentralised industry base, relying on factor inputs that are widely geographically distributed for most industries.On top of that, most of our exports have to travel large distances just to leave the local map, and most domestically produced goods we buy in any given state orginate in a different state.Yet we dont have the population of a size that can really utilise the economies of scale that places like the US do, meaning out transportation costs are relatively high per unit of consumed good, and are more sensitive to energy costs.

Australia has cheap energy not only because we can have it, but because we need it.

As I'm sure you are well aware, prices dont move in leaps and bounds, they move in increments over time.And as petrol becomes more expensive, the very incentives you are talking about, the price signals, start to kick into operation.

Australias petrol isnt artificially low, its artifically high because its taxed differently, at higher rates to most normal goods.The fact that some countries tax it even higher doesnt make ours artificially low, it just makes their prices artificially higher.

I cant see the world ending myself.

I'm sure a booming, efficient and cost compebreastive conversion industry will spring up when the time is appropriate.

Diesel can be made from coal and biomaterial for less than that, so you've got a price ceiling with compebreastion there.And that's before economies of scale start comming into play.

On the LPG front, LPG prices move roughly in line with crude prices because of cartelisation more so than anything else.There's a limit to that too, because of simple supply issues with LPG.

The energy efficiency of the industrial base is more complicated than that.The large component relates to the price of electricity - which we can produce dirt cheap.Its mostly oil irrelevent.The Euros subsidise their electricity because of their relatively large nuclear component - so you have to take that into effect to begin with.

On the transportation side, well that buttumes that the proposed the European efficiency gap would be driven by some first mover advantage, but by moving first they are banking on their up front costs (including the opportunity costs of foregoing cheap petrol while it is available) being less than their discounted savings over time.

I'm not convinced, and neither is Australian industry, particularly the mining sector which experiences larger mobile energy costs than any other industry in the goods production business.The industrial portfolio of Europe is also fundamentally different from ours.They can handle more expensive energy - we require cheap energy because of the volumetric nature of key industries like primary production and resources.

Take a deep breath - the sky isnt falling. Our electricity will remain cheap.

We can switch to coal based and biodiesel more easily than any other country with the possible exception of the US.Coal based diesel is predicated on coal supplies - us in spades.Biodiesel is predicated on agricultural waste material - us in spades.

Until the point comes where diesel becomes decoupled from the price of crude - doing that is a waste of time.The only advantage to be had is in terms of infrastructure development.But why not let those who move first sort out the production problems first, so that when the time comes for infrastructure conversion, we can do what Australia is good at, use other peoples technology better than they do?

Let them be burdened with the development costs.Let us buy it when its tested and commercially off the shelf.We've already lost the race to be technology producers for this -let those that are leaders bear the costs.

It will cost you, through inflation because transportation of goods isnt an optional extra, building higher prices across all goods in the economy.And the tax cuts that you want to offer as the carrot just mean that it boosts demand, making higher levels of interest rates being required to quell inflation than would ordinarily be necesarry.

That's essentially what we are talking about here.Carbon based energy.

I think our artificial inflation of the price of energy by treating petrol as something other than a normal good is harming the economy.