The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand.

– Adam Smith in his book ‘The Wealth of Nations’.

Who would have thought that 34 years after the collapse of communism in the USSR and 43 years after the Hawke-Keating government started the process of dismantling Australia’s prices and income regulatory system, that Australia would be back reintroducing a Soviet style price control mechanism that caps gas and coal wholesale prices.

Someone has not been reading their economic history. There are no lack of lessons from the past  that point to the unintended consequences of governments intervening in markets in an attempt to address short term political problems.

We have on our hands either a completely clueless federal Labor government or one blinded by its ideological suspicion of markets and ingrained disdain for the big mineral companies that produce the vast majority of Australia’s wealth.

It seems the recent decision to mandate a code of conduct to force gas to be sold to domestic users at a “reasonable price to ensure certainty” was driven by a mix of populist politics and green ideology. In reality, it is nothing more than old school socialism.

These are the same instincts that saw Prime Minister Ben Chifley blow the then Labor government apart in its attempt to nationalise the banks back in 1947.

Nearly 80 years later we have another Labor government embarking on its own a foolish move to take control of what they see as a key part of the Australian economy on the logic that they are stopping war profiteering.

The difference between then and now is that the Menzies opposition rose to the occasion and ran hard on a policy to reverse the move, and in turn the whole of the private sector was in lockstep behind the opposition.

This time we see a lackluster response from the opposition and self interested sectors of the private sector, (invariably those big gas users who have not managed their long term price risk by locking in lower gas and coal prices), plus one billionaire rushing out to applaud the government for intervening in the market at the expense of shareholders. 

Andrew Forrest said:

“This was not the time to sit back and do nothing. Action was critical to stop the pain on Australian families.”

Seems this billionaire likes government intervention when it suits him, but some will recall how he screamed the house down when a previous Labor government introduced the super profits tax on iron ore.

But memories are short. He also said:

“We cannot allow fossil fuel companies to present themselves as the only reliable energy source while continuing to exploit Australian households. We have gullibly swallowed this line for too long.”

Seems he is also very happy for the government to continue to force families to buy expensive and unreliable wind and solar energy from companies like CWP Renewables, (a renewable energy company recently purchased by his private family business for $4 billion), or – another example – recall his brilliant idea for the diesel fuel rebate to be diverted to subsidise green hydrogen, another business that Forrest has financial interests in.  

But he is quite right, we are gullible if we listen to people who claim renewables are cheaper than fossil fuel.

Maybe the government should reintroduce Rudd’s super profits tax on companies that profit from selling iron ore to a country that is a totalitarian dictatorship which exploits Uyghurs and continues to build coal fired power stations.

For someone who lives in a large glass carbon consuming mansion one would think Twiggy would be more circumspect on buying into political debates, particularly where naked self-interest makes him a target for accusations of hypocrisy.

I suspect the one ‘certainty’ that is likely to be achieved by the government’s decision to cap energy prices is that Australia now faces an oil and coal capital drought as companies decide to park up planned investments in Australian petroleum projects and look elsewhere for projects where the returns are not capped by arbitrary government decisions.

Twiggy and the Green Left are not the only ones who like a good dose of government intervention. Some older farmers have fond memories of the old statutory marketing schemes, the aptly named single desks with the power to compulsorily acquire grains, wool, milk, meat and potatoes in an effort to prop up prices by limiting production or underwriting production.

The unions also like schemes that empower them to limit competition, which at their height saw farmers paying high tariffs on cars, tractors and trucks to protect uncompetitive manufacturing and local jobs, which hit farmers with higher input costs. 

Intervening in the market has a domino effect as one person’s gain is another’s loss.  High gas prices encourage exploration which keeps the long term price down.  Cap prices and the existing reserves are run down as exploration dries up, which then sees the domestic price going up. It’s not rocket science. 

I wonder how farmers would react if the government decided to end the export of beef or capped the local price of grain to support local feedlotters, dairy and egg producers in an attempt to help the domestic consumer cope with cost of living pressures as meat, milk and eggs, like energy, are all essentials.

If it’s good enough to cap the price of energy why isn’t it good enough to cap the price of food? Not that any of this is new; part of the original justification of putting in place the agricultural marketing schemes was to ensure food security.   

We are not alone in messing with markets on the basis it will keep the domestic price of food down.

Other countries also think it is a great idea. For example, Argentina places a tax of 33 per cent on soybean exports, 31 per cent on soymeal and soy oil, and 12 per cent on wheat and corn, all of which are cheered on by local voters.  

More than 20 countries around the world have implemented some form of food export restrictions on their farmers, including Egypt, India, Indonesia, Malaysia, Iran and Turkey, covering everything from wheat, corn, flour, tomato, vegetables oil, beans and chicken.

Predictably, in every case, returns to growers are lower than what they should be and with it their incentive to invest and increase production. The end result is that, over time, production goes down, resulting in higher prices for consumers as farmers move production across to other products free of any government restrictions. 

How and why the Australian government thought that no such thing would happen in our energy market is beyond me.  All our major gas and coal producers have exploration acreage overseas and can redeploy resources at short notice. 

More likely, this government knows exactly what they are doing and their decision fits their ideological dislike of big coal and gas producers, plus they think it will speed us towards the economic nirvana of a renewable economy.

It’s strange that government is worried about the cost of energy now when everything they are doing is driving us towards higher energy costs in 2030 as they push their renewables target.

If they really cared about ensuring we had access to cheap energy they would stop subsidising renewable energy, drop the royalty on domestic gas and coal and put in place an exploration tax incentive scheme with the aim of keeping the drill rigs working.

The state governments also have much to answer for. They have had 18 months since gas prices started to climb in which they could have moved to lift the ban on fracking and incentivise the eastern states pipeline operators to build new pipes to plug gaps.

But it seems they and their federal colleagues were more interested in talking about how renewables would reduce the cost of energy than addressing a predictable rise in gas prices that was  supercharged by the Russian invasion of Ukraine 12 months ago.

No doubt the government will find what every government in the past has found that has put in price caps or subsidies – that it is hard to extract itself from market intervention. Once in place, it’s hard to ween an industry or community off a subsidy. 

Just look at the renewables sector. They can’t survive unless the government drives coal and gas out of the game, just as our car manufacturing sector in its day needed ever higher subsidies to survive.

The same will happen here when, in 12 months, the price cap is due to be lifted and those industries who have enjoyed the cheap gas bonanza come out wailing that big brother keep up the good work and extend the price caps.

Here is another unintended consequence. Over the next 12 months, what energy using company will take the risk of locking into a long term contract higher than $12 for gas or $125tn for coal when they can simply lobby government to roll over the price caps?

I doubt if the new planned local urea production facilities not yet started will now get off the ground unless they have their own gas field, as no gas producer is going to sign up to supply long term domestic contracts that have prices set by government when they can switch to supplying the export market at far higher prices.

In turn, this will see increasing pressure on the federal government to impose their proposed domestic gas reservation schemes, similar to the one we have in Western Australia which was set up over 40 years ago as part of the North West Shelf take or pay incentives. 

Note it was set up as part of the deal to encourage the long term North West Shelf project to get off the ground in the late 1970s, not as a political fix for a government’s short term domestic problems.

Any further government intervention will simply lead to demands for further government intervention.  Already we are hearing of deals to compensate the producers using taxpayers’ money, which raises the question why they did not just offer support to the gas users rather than a price cap?

It’s a political economic mess that is going to cost us all.  It’s a predictable path we have embarked upon but one thing is for certain, the invisible hand of the market will eventually catch up with this government and it will hurt.