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Transcript 22419

Statement to Parliament on Energy Initiatives Parliament House, Canberra

Photo of Howard, John

Howard, John

Period of Service: 11/03/1996 to 03/12/2007

More information about Howard, John on The National Archive website.

Release Date: 14/08/2006

Release Type: Speech

Transcript ID: 22419

I wish to provide the House with the Government's assessment of some key energy challenges and to announce a number of measures to assist hard-pressed motorists to better cope with very high petrol prices.

Before turning to these issues, it is important to note the broader economic context. Australia's economy continues to perform very strongly relative to other countries and in historical terms. This was amply demonstrated last Thursday by the fall in unemployment to 4.8 per cent, the lowest level recorded since August 1976.

The OECD said in its economic survey two weeks ago that Australia is one of a handful of developed economies to have averaged 3 per cent annual growth since the start of the millennium - a performance that is forecast to continue in 2006 and 2007.

The OECD found that living standards in Australia have now surpassed those in all the major industrialised nations, with the exception of the United States. With a strong economy, Australians can plan for the future with hope, optimism and confidence.

This statement comes against a backdrop of high world oil prices, and in turn high petrol prices. There is a degree of irony in the fact that Australia is a major beneficiary of the single most important structural cause of high world oil prices - namely the re-emergence of China as a global economic powerhouse.

Australia is more fortunate than other developed nations all of which endure the pain of high fuel prices without benefiting nearly as much as Australia from China's rapid economic growth.

Last month I outlined the enormous opportunity this country has to build its global energy advantage in the 21st century if we think and act boldly. I stressed the need to maintain policy flexibility at a time of growing international concern about energy security.

Despite our substantial energy assets, most Australians feel the impact of soaring global energy demand not via a better job, a larger pay packet or a bigger share portfolio. They feel it at the petrol bowser.

Today I am announcing a series of practical steps that will give Australians cheaper fuel options, further develop our energy resources and help to underpin the nation's long-term energy security. This total expenditure on these measures will be $1.576 billion over the next eight years.

In the last two years, world oil prices have risen to historically high levels. Australian families and businesses are hurting from the rise in domestic petrol prices of about 40 per cent over that period.

There remains a spectrum of opinion on future oil price trends. Based on new production and refining capacity that will come on stream, the International Energy Agency expects some easing of high oil prices over the next few years. Even so, the best guess of the futures market is that prices will remain at or above US$75 a barrel through the first half of next year.

Many factors have contributed to high world oil prices. Geopolitical instability, especially in the Middle East, is one factor feeding heightened energy security concerns. The major cause, however, is to be found in market fundamentals.

On the demand side, China's rapid industrialisation combined with a pick-up in demand from India and a period of synchronised global growth has prompted a rapid increase in oil demand. On the supply side, an extended period of under-investment in global exploration and refinery infrastructure has limited the capacity of the industry to respond quickly to the surge in world demand.

One-off events, such as Hurricane Katrina and the shut down of North America's largest oil field in Alaska, have added to supply constraints in recent times.

Since oil is a globally traded product and Australia is a net importer of oil, there is no escaping the surge in oil prices. Changes in Australian petrol prices closely track changes in the world price of oil, notwithstanding the claims by many to the contrary.

The facts speak for themselves. In the last 12 months, the world oil price has risen by 16.8 per cent. The price of unleaded petrol in Australia has risen by 15.7 per cent.

The Australian Competition and Consumer Commission (ACCC) has powers to protect consumers from unlawful anti-competitive conduct and unlawful market practices through the provisions of the Trade Practices Act.

The ACCC monitors the daily average retail prices of unleaded petrol, diesel and automotive LPG at roughly 3,600 sites across Australia. Last week the Treasurer announced that the ACCC would extend its monitoring of fuel prices to include E10.

Petrol retailers who engage in price fixing are breaking the law and the ACCC has the power to take action against them.

Last year penalties of over $20 million were imposed on petrol retailers in two cases as a result of action taken by the ACCC. A further case is currently before the courts.

However, all price movements are not necessarily price fixing. ACCC monitoring of petrol prices shows that regular weekly price cycles occur in Sydney, Melbourne, Brisbane, Adelaide and Perth. In most of these cities prices overwhelmingly tend to peak on Thursdays and trough on Tuesdays.

The weekly price peak on a Thursday occurs whether or not there is a public holiday in that week. Evidence from ACCC price monitoring over a six month period shows that the price variations that occurred before public holidays were in some cases below average and in some cases above the average.

The simple, if unpalatable, truth is that the Government's capacity to alleviate the impact of high petrol prices on consumers is necessarily limited.

And going beyond carefully-considered measures consistent with our long-term national interest would be irresponsible.

Let me illustrate. A petrol excise cut that would deliver a 10 cent per litre reduction in the petrol price would blow a hole of about $2.5 billion or more in the budget surplus and reduce our capacity to meet spending priorities in areas such as national security and health or to provide further tax relief.

Given the volatility of oil prices, the benefit to the motorist of such an excise cut could be easily and quickly devoured.

As the House would know, excise is a volumetric tax so that Commonwealth revenue collections do not rise in line with higher petrol prices. It is true that GST collections - all of which go to the states and territories - will have risen, but even here there will have been a substitution effect at work.

Revenue from the Petroleum Resource Rent Tax is higher due to increased oil prices. However, this tax is also a deductible business expense.

Though of no comfort, but I stress this, to Australian motorists, petrol prices in this country are relatively low by international standards - the 4th lowest in the OECD according to the International Energy Agency.

If we look around the world, for example, the price of unleaded petrol in France is currently 58 per cent above what it is in Australia. In Germany, it is 67 per cent higher. And in the United Kingdom the price of unleaded petrol equivalent to more than A$2.30 per litre is about 70 per cent higher.

The lower price in Australia largely reflects relatively low fuel taxes and steps the Government has taken to help keep petrol prices down.

For example, when the GST was introduced, the level of excise on petrol and diesel was cut by 6.7 cents per litre. In March 2001, the Government reduced fuel excise by a further 1.5 cents per litre and abolished half-yearly indexation.

This decision froze the rate of excise removing an ongoing source of price pressure. If we had not taken this decision, the excise on petrol products would be about 8« cents per litre higher than it is today.

Looking to the long term, the Energy White Paper that I released in June 2004 established a balanced framework for supporting alternative transport fuels.

Measures announced include significant ongoing excise concessions, a $1000 grant for new Liquid Petroleum Gas (LPG) vehicles from 1 July 2011 and a $37.6 million capital fund to support new biofuels production capacity.

Alternative fuels such as LPG and ethanol are currently excise free. The gradual introduction of excise between 2011 and 2015 will result in a transport fuel tax regime that is both efficient and fiscally responsible. In ten years time and beyond, the excise rate on alternative fuels will still be at least 50 per cent lower compared with other fuels with a similar energy content.

Australia has access to potentially large sources of alternative fuels and a diversity of energy supplies helps to ensure reliability, security and competition. Working with market forces at a time of high oil prices to encourage investment in alternative fuels is simply commonsense.

Today I am announcing new measures to further accelerate investment in alternative fuels and to provide Australian motorists with more and cheaper fuel options.

Our largest alternative transport fuel is LPG. Australia has the capacity to produce substantial amounts of LPG given our natural gas and oil reserves. It is a product which has been in the market place for some time and is a familiar source of alternative fuel for consumers.

LPG is readily available through 3,200 service stations in Australia. Nearly half of them are in regional or rural areas.

It is usually much cheaper than regular unleaded petrol and diesel due to a range of factors, including concessional tax treatment. The average LPG retail price across Australian capital cities in July was 40 per cent of the price of unleaded petrol.

To capitalise on Australia's LPG resources, the Government has decided to bring forward the previously-announced rebate for the purchase of new LPG vehicles for private use. As of today, we will contribute $1,000 to the purchase cost of a new factory-fitted LPG powered vehicle.

In addition, the Government will provide a grant of $2,000 to the cost of converting vehicles to LPG for private use.

In the past, it has typically taken consumers up to two years to pay off the additional costs associated with purchasing or converting to an LPG vehicle. The new LPG rebates are expected to cut this pay-back period significantly.

While savings will depend on fuel consumption and driving habits, the Australian LPG Association estimates that, on average, the fuel bill for a six cylinder vehicle travelling 15,000 kilometres a year would be cut by $27 a week, or more than $1,400 a year, following the conversion.

With these savings and the $2,000 rebate, it would take only four months for the motorist to recoup the net cost of a $2,500 conversion.

The West Australian Government is currently providing a subsidy of $1000 on the purchase of new LPG vehicles or for LPG conversions. I encourage other states and territories to follow the lead of the Commonwealth and WA Governments in encouraging Australians to explore this cheaper fuel alternative.

I am also pleased that the board of the peak industry body - LPG Australia - has established a taskforce to address future needs of consumers and the industry. The Government will be working with the industry to provide advice to consumers on issues such as the suitability of vehicles to be converted.

Australian motorists will need to weigh up the costs and benefits of taking up the incentives which I am announcing today. The Government will ensure that consumers have all the relevant information they need to make the right decisions.

The estimated cost of the LPG incentives is $677.1 million over the eight year life of the programme. Taking into account revenue forgone, the total cost is more than $1.3 billion over eight years.

Ethanol blends can also make an important contribution to meeting Australia's transport fuel needs.

The Government has spent $55 million to date in production grants to effectively offset the excise on ethanol production in Australia. We have already implemented a range of measures to help companies achieve a target of at least 350 mega litres of biofuel production in Australia by 2010.

Substantial new investments are now underway. While there were 70 service stations selling ethanol in Australia in June last year, today the figure is about 260. BP plans to increase ethanol sales 100-fold over the next two years. Caltex plans to double the number of ethanol retail sites by the end of this year. And Woolworths is set to enter the market next year with 50 sites.

The Government recognises that lack of access to distribution infrastructure remains one of the barriers to the uptake of ethanol. To address this, I announce today additional expenditure of $17.2 million over three years to reduce the infrastructure cost to retailers of installing new pumps or converting existing pumps to E10 blends and to encourage sales of E10.

The Government will allocate up to $20,000 to the cost of converting retail petrol stations to supply E10. Up to $10,000 will be provided after the conversion is complete and an additional $10,000 after an ethanol blend sales target is reached.

The additional grant on reaching a sales target will provide a clear incentive for retailers to discount the price of E10 fuel. Recipients of grants from the ethanol distribution programme will be expected to sell ethanol blends at a discount and to display the price of ethanol blends alongside price information for other petroleum products.

Because this Government believes in consumer choice we are not persuaded to mandate the use of ethanol. We will, however, continue to explore practical measures that effectively mandate the availability of cheaper ethanol-blended fuels for Australian motorists.

This Government has worked hard to restore confidence in ethanol after the disgraceful campaign waged by the Labor Party against this industry.

Labor spent the better part of a year trying to discredit ethanol, criticising the Government's support for ethanol production in Australia, even targeting an individual company and its owner.

The Labor Party deliberately set out to scare Australian motorists off using ethanol-blended fuels. The former Opposition Leader, the member for Hotham, talked about motorists, 'having their engines wrecked by ethanol fuel'.

It really pains me to say that even the Member for Batman was up to his neck in Labor's campaign to destroy consumer confidence in ethanol.

And this is what he had to say on 17 September 2003: '... we (the Labor Party) have still failed to see any demonstrated advantages in the subsidisation of the local ethanol industry. The facts speak for themselves he said. Up to one-third of the 10 million cars in Australia will not operate satisfactorily on petrol containing 10 per cent ethanol.'

That was wrong then and it is wrong now. Ninety per cent of cars on the road in Australia can confidently run on E10, including all new cars.

Ethanol has a future in this country because of only one side of politics and that is the Coalition.

High oil and petrol prices do have an acute impact on regional and remote communities that rely on diesel for power generation as well as transport.

The Government's Renewable Remote Power Generation Programme is designed to encourage the replacement of diesel generators with renewable energy sources for power generation and water pumping.

In a good example of the success of this programme, Bremer Bay, a small community on the south coast of Western Australia, is now being supplied by a wind-diesel system with the wind turbine providing on average 40 per cent of the town's electricity. Diesel consumption has been cut by up to 340,000 litres a year, which equates to almost $480,000 a year at today's fuel prices.

Today I announce that the Government will spend an additional $123.5 million over four years to extend and expand this programme. For the first time, funding will be made available for energy efficiency projects to reduce demand and for industry support activities that encourage the uptake of renewable energy technologies in these areas.

Encouraging further oil exploration in Australia is a very high priority for the Government.

Two thirds of the world's oil reserves are concentrated in the Middle East. And the role played by the Middle East in world oil production is set to grow in coming decades. Australia must explore oil, I am sorry, all avenues to reduce its future dependence on Middle Eastern oil.

While known oil reserves are declining, much of Australia has been explored only at a shallow level and large areas of remote frontier provinces remain under explored. Current exploration activity is largely 'brownfields' exploration rather than the higher risk,'greenfields' exploration that is aimed at identifying new resource provinces.

Australia has some 40 offshore basins that display signs of oil potential and half of them remain unexplored. Encouraging further exploration could see the discovery and development of resources the size of those in Bass Strait.

In a high-cost, high-risk field, where global investment competition is fierce, governments have an important role to play in providing good geo-science information. Identifying and assessing Australia's resources is the first step in developing them.

To this end, the Government will expand Geoscience Australia's current programme of seismic acquisition, data enhancement and access. At a cost of an additional $76.4 million over the next five years, this expanded programme will focus on new frontier offshore areas to be chosen in consultation with the industry.

The Government will also commit an extra $59 million over five years to identify potential on-shore energy sources such as petroleum and geothermal energy. Using the latest geophysical imaging and mapping techniques, this information will help attract companies to explore in new areas by enhancing the chances of discovery and reducing the risks to investors.

To secure Australia's energy future in the face of high oil prices, the Government will continue to examine a range of additional fuel and energy technology options.

We are keen to explore how Australia might contribute to the development of more fuel-efficient vehicles including hybrid vehicles tailored to our market and to export opportunities.

Our abundant coal and gas reserves also provide the basis for meeting future transport fuel needs should commercial circumstances and technology dictate their feasibility.

I therefore ask the Minister for Industry, Tourism and Resources, The Honourable Ian Macfarlane, to bring forward to Cabinet a proposal for a dedicated fund to position Australia as a leader in gas-to-liquids and coal-to-liquids research.

This is consistent with the approach we have adopted with the Low Emissions Technology Development Fund. Unlike the Labor Party, this Government is determined to build Australia's energy advantage through leading-edge technology, not sacrifice jobs, the jobs of Australian workers and Australian exports through premature carbon taxes that would only cripple Australia's coal and gas industries.

This is a difficult time for Australians faced with high petrol prices, and it is only appropriate that the benefits which accrue to Australia from our substantial resource base flow beyond a narrow part of our society.

Even so, we should not lose sight of the positive outlook for Australia as a major global energy supplier. Our natural resources and man-made assets are the envy of most other countries in the world, and the principles laid out in the nation's energy goals of prosperity, security and sustainability. The measures I have outlined today will make a practical contribution to further developing and utilising Australia's energy advantage for the benefit of all of the Australian people.

Transcript 22419