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The age of energy nationalism

nuclear energy

What can we learn from the current state of the world, and why are some countries more compromised by energy nationalism than others?

Words by Alexandra Colalillo.

The growing influence of rational actors, such as Russia and China, in the transition to a sustainable future has posed a threat to global economic stability. 

This influence is borne from the exploitation of the control of supply and politicisation of energy resources, used as a weapon to spur national security panic within countries dependent on those resources. Along the transitory path to renewable energy, what can we learn, and why are some countries more compromised than others? 

Complacency and absence of forward planning 

In an effort to achieve sustainability targets, we have witnessed instances of minimal planning and consideration to future national security threats in the transition to a low-carbon economy.

For example, in response to nuclear incidents such as the 1979 Three Mile Island partial nuclear meltdown in the US, the 1986 Chernobyl disaster in Ukraine, and the 2011 Fukushima nuclear disaster in Japan, Germany adopted a nuclear phase out, with the intent to shut all nuclear reactors by the end of 2022. 

However, it’s important to note that fewer people have been affected (per kilowatt of energy produced) from these three nuclear incidents combined than from rooftop solar incidents. To close the energy gap from nuclear sources, Germany has instead planned to turn to renewable energy in an effort to achieve its 2045 climate neutrality target. 

But critics believe this was a premature decision for two reasons: first, renewable energy sources such as wind and solar PV are not sufficient in scale to support Germany’s electricity needs; second, as global energy prices rise and the Russia–Ukraine conflict continues to pose a threat to Russian gas deliveries, many have called on Germany to re-evaluate its nuclear exit. 

Alexandra Colalillo is an economist and manager at a multinational professional services firm in Western Australia.

In response to geopolitical threats, Germany has since kicked off deals with the world’s top liquified natural gas (LNG) exporter, Qatar, to substitute for lost Russian gas supplies. But while Germany is one of the world’s biggest gas importers (sourcing 95 per cent of its consumption from abroad), the country never planned a perceived long-term economic case for direct LNG imports given its interconnectedness to pipelines from neighbouring countries and because European LNG import capacities were heavily underutilised. 

As a result, no up-front investment in infrastructure for a domestic LNG terminal was made and Germany now doesn’t have its own port to receive LNG directly. 

This has left the country in a vulnerable position, rushing the development of two domestic import terminals to govern energy supply on its state territory and guarantee sovereignty. To speed up the construction process in the wake of sanctions on Russia, the German Government has an LNG Acceleration Act, allowing licensing authorities conditions to temporarily waive some procedural requirements under certain. 

In addition to one or more fixed onshore terminals, the German Government is supporting the investment in leasing short-term floating storage and regasification units (FSRU), two of which could be installed as early as winter 2022–23.

However, critics of Germany’s LNG import terminal developments argue they will further the energy crisis and harm the climate, as they will only be used to import fossil natural gas. The plan will therefore not contribute to the energy transition, but rather cement the country’s dependence on climate-damaging fuels for decades to come. 

The east coast of Australia faces a similar position – New South Wales is facing steep hikes in the cost of power and impending supply shortages in the absence of a domestic gas policy. In response, the state is also scrambling to quickly build LNG terminals (eg the $250 million LNG import terminal at Port Kembla, set to be ready to import gas in early 2023). 

While Western Australia reserves 15 per cent of gas for domestic use, any move to ship the state’s gas east would also require the construction of more LNG receiving facilities.

Economic dependence on trading partners 

In an era in which China is prioritising self-sufficiency and reduced dependence on foreign raw materials, Australia’s economic stability is exposed.

China is Australia’s sixth largest trading partner, fifth biggest supplier of imports, and its 10th biggest customer for exports. In fact, 25 per cent of Australia’s manufactured goods are currently imported from China.

While China is economically critical for Australia, the reverse is less true. For example, 70 per cent of Australia’s exports are resources for which there are alternative suppliers. 

An instance where this economic dependency is exploited sits within China’s wider strategy to achieve 45 per cent iron ore self-sufficiency by 2025. This demonstrates China’s determination to wean itself off Australia’s iron ore in an effort to boost domestic iron ore production by 30 per cent, increase investments in overseas mines, and strengthen scrap steel recycling. 

Australia’s iron ore profits are now further exacerbated with the recent development of the China Mineral Resources Group (CMRG), which is acting as the country’s central iron ore purchaser. This central purchasing power is designed to control iron ore demand and enhance Chinese steel producers’ negotiating power over prices.

An additional critical factor threatening Australia’s iron ore profits is China’s sluggish gross domestic product (GDP), growing just 0.4 per cent in the second quarter of 2022. While there has been a small rebound in activity amid easing lockdowns, the economy would need to have grown by 8.5 per cent in the second half of the 2022 calendar year to reach the nation’s 2022 GDP target of 5.5 per cent. 

If Australia had not built a dependency on China as a source of export revenue, particularly in WA, and planned to diversify supply chain co-dependence, the economic wellbeing of the state would not be at such threat.

China’s changing priorities could spell danger for the Australian iron ore industry.

Ineffective economic policy responses 

Supply chains affected by the COVID pandemic and Russia–Ukraine conflict represented one the greatest global economic shocks in the 15 years since the global financial crisis (GFC). 

Reduced supplies of energy, metals and agricultural commodities, paired with a stronger-than-expected rebound in demand from the pandemic, placed an upward pressure on output prices for commodities and commodity derivatives in all countries, including Australia. 

As a result of surging global energy prices, countries have scrambled to implement policy measures to alleviate inflationary pressures which are now affecting global economic prosperity. 

In response, Australia, among other countries, adopted an aggressive and delayed monetary-tightening approach. The Reserve Bank of Australia (RBA) had increased the cash rate to 3.1 per cent as of January 2023.

However, this economic policy response has been questioned by critics due to the fact inflation has not been driven as much by domestic Australian demand as it has by global supply-chain disruptions. As a result, these cash rate hikes have not had the desired effect to make a material impact on global commodity prices and broader inflationary pressures. 

In addition, economic and wage growth has remained mild and employment growth has been sluggish, while inflation persists. This is now materialising the risk of ‘stagflation’, whereby wage growth isn’t enough to warrant inflationary pressures. 

And given wages have not followed suit with price growth, the rise in the cost of living has placed a greater-than-desired impact on economic growth. It should be noted that this situation is not unique to Australia. 

Due to a lack of forward planning, critical economic dependence on trading partners, and ineffective economic policy over the last 12–18 months, opportunities to minimise exploitation over the control of supply and politicisation of demand for energy resources have been disregarded – and this may well be our undoing. 

This feature appeared in the December issue of Australian Resources & Investment.

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