Communism in mining - Liberal Party style

Industry Minister Macfarlane wants to rush miners into extracting "every molecule of gas", but the interests of Australians (as opposed to politicians) are best served by letting the private sector to determine project timing.

The Australian today carries the story ‘Use it or lose it, miners warned by the Coalition’ ,reporting that incoming industry Minister Ian Macfarlane is warning companies that if they put resource extraction projects on hold they could have their retention leases revoked by the government.

Macfarlane told The Australian: "I want to put the industry on notice that if the deposits are able to be developed they've got to be developed".

And in terms that will alarm those concerned about climate change he also said: "We've got to make sure that every molecule of gas that can come out of the ground does so.”

Trying to rush resource development projects faster than private sector wishes is dumb economics. There are good reasons for why economic wealth is likely to be maximised over the long term by allowing the private sector to be free to choose which time to progress their project.

This is an area where market-oriented economists and environmentalists can probably agree, while politicians of both political persuasions will fervently disagree (Labor are similar to the Liberals on this topic).

Rushing resource projects into production is heavily favoured by politicians because they are typically only around for a short period of time. As they say a week is a long time in politics, and politicians have a preponderance to think within the three-year timeframe between elections. At best a minister might hold their portfolio for six years. By nine years the odds are the electorate will grow tired of you even with a good record.

Accelerating resource development sounds great to a politician because it means they get to see the the jobs, investment and taxation revenue while they’re still in office. Sure, that might come at the expense of benefits down the track but 'who cares' says the politician because they won’t be around.

The problem is that this may not maximise the cash flows of the resource - not just for mining shareholders, but also for the Australian people who tend to be around for 70-plus years. By allowing companies to make their own decisions about when to develop projects it can actually help the community as a whole because of two reasons related to companies maximising profit:

1) Companies will generally look to maximise price for the resource. Bringing a project on too soon can lead to oversupply which depresses prices. This flows directly through to the broader Australian community through state government royalties which are often tied to prices. It also hurts Federal Government tax revenues which are tied to profits (although the Coalition wishes to abolish the Minerals Resource Rent Tax, which is a type of profits tax).
2) Companies will also be focused on minimising costs to construct the project. If you try to bring on too many projects all at the same time you don’t actually improve overall employment, you just end up hitting capacity constraints. This leads to cost inflation which while it might benefit some construction workers’ wages for a period of time, hurts the cost-competitiveness of the rest of the economy and increases the cost of living. It also hurts federal government tax revenue which is tied to company and project profit.

We’ve already seen that there are limits to how many gas resource projects we can bring online at the same time before we see cost blowouts. The rush of LNG projects in northern WA and Gladstone, Queensland have all experienced serious capacity constraints in construction personnel and capability. In addition we’ve seen how the mining and LNG boom has led to crowding out of other sectors of the economy. Some of these sectors may provide greater longevity of employment and income than a construction boom, but have struggled to survive through its short-term inflationary spike in costs.  

If anything this illustrates that even the private sector tends to rush resource projects too fast. That’s because they are in a competitive situation with other miners, and won’t be thinking to maximise long-term cashflows for the entire Australian resource base. So the last thing we need is governments trying to push them even faster, unless of course we’d like to be charitable to India, China, Japan and Korea by giving them cheaper commodities.

Studies of human psychology find that people feel a loss of income far more severely than a gain. Also people experience rapidly diminishing returns with further gains in income. For these reasons a steady but maybe slow rise in incomes is far better for people’s sense of welfare than a rapid rise in income followed by a bust.    

Politicians trying to impose their own preferred timetables for resource development is more akin to Soviet Russia than liberal free markets. And it’s equally bad for the Australian community.

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