Australia’s Rightful Place

We must accept globalisation is now in reverse, and agree energy security is national security, argues IPA executive director Scott Hargreaves.

As we witnessed Russia’s tanks rattle through Ukraine’s countryside, and China’s balloons floating over North America, so too have we witnessed the end of the globalisation era. Spanning roughly from the fall of the Berlin Wall to the invasion of Ukraine in 2022, globalisation—at least the incredible growth in world trade and interdependence of global supply chains we witnessed—is now over. As Australians, we need to understand and help shape what is to come, particularly in the face of belligerent forces in the Asia-Pacific.

The late, great Senator Jim Molan only expressed part of the truth when he said it was futile to develop a defence strategy in the absence of a National Security Strategy.

Molan rightly said:

How can there be a defence strategy without an overarching and comprehensive national security strategy? What good is it to have a brilliant defence strategy without national liquid fuel, industry, pharma, science and technology, manpower, diplomacy and stocking policies. What good is it for us to be world class at anti-access/area denial based on brilliant materiel solutions if we can no longer feed the people due to a lack of diesel?

A national security strategy is a non-negotiable objective—however tough it is to achieve even that—but for it to be effective we first need a shared sense of strategic purpose at government’s highest levels. Its development requires us to address some fundamental questions: what is the global geopolitical and economic situation in which Australia finds itself? What is our competitive advantage? To what do we owe our friends, and who are they?

More than 30 years have passed since Harvard’s Professor Michael Porter, the doyen of business strategy theorists, described the basis of ‘The Competitive Advantage of Nations’ (Harvard Business Review, March-April 1990):

National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.

This requires maintaining national prosperity as a primary objective. Not only is it fundamental to the standard of living of Australians, to afford nuclear submarines and others such items said to be essential to our security we must have the economic base to pay for them.

The visionary governments of Court and Bolte are a thing of the past.

It is essential for these insights of competitive advantage to be applied correctly to the Australian context. Too often (see Mike Cannon-Brookes, later in this article) there is a belief that because the level of natural resources does not automatically translate into prosperity (the Japanese do quite well without them), they are irrelevant. An oft-heard slur is that our economy was for a long time merely a ‘giant quarry’, as if minerals lie about just waiting to be picked up. But the massive iron ore industry of Western Australia did not exist before Sir Charles Court, as Industrial Development Minister and then Premier, worked with visionary leaders to create it out of nothing. The Bass Strait oil and gas fields were a hypothetical resource, until the then Victorian Premier, Henry Bolte, invited first BHP and then ExxonMobil (Esso) to explore and develop what became for a time one of the world’s great petroleum provinces.

Thus while it would be complacent to assume the mere presence of natural endowments would guarantee prosperity, it would be even more dangerous to ignore them and assume we can create new sources of prosperity from uncertain foundations. As Adam Boyton, then chief economist for Deutsche Bank AG, told Global Post as far back as 2011:

It (mining) has been a reality of our competitive advantage for a long time. I mean, jump back 10 years ago when Australia was ‘old economy’. People were making those same comments, you know ‘why would you invest in Australia? It’s old economy. It’s not high-tech. It doesn’t do this and it doesn’t do that’, and as it turns out that was about the time that China started to emerge, and in very dramatic fashion. It’s always been a country dependent on commodities: 150 years ago, putting the first gold rush to one side, it was largely agricultural commodities. Now it’s a different set of commodities. And that’s just the nature of Australia’s competitive advantage.

As in the above examples of Charles Court and Henry Bolte, governments have had an important role to play, but not through picking winners which just leads to crony capitalism. As Porter also said:

In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Competitive advantage is created and sustained through a highly localized process. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success.

Unfortunately, the visionary governments of Court and Bolte are a thing of the past. Due to a series of High Court decisions, power has been centralised in Canberra, just as Canberra shifted from a policy of national development (as evidenced by the Snowy Mountains scheme) to one of ecologically sustainable development (which is sand in the gears of development of any kind). The elites of SydMelberra embrace a European vision of the post-industrial age spruiked at Davos, while back in the real world in the rest of Australia, millions of people are adding value to natural resources and creating wealth.

Hence we have governments pursuing ‘development’ strategies which destroy our existing capital stock of power stations and mines, and instead commit taxpayer funds to subsidise projects based on imported materials. In 2022 the Victorian Premier, Daniel Andrews, obtained a mandate at an election to resurrect the State Electricity Commission. If only he was truly to reboot the vision of the original SEC General Manager and later Chairman, Sir John Monash, who successfully achieved electrification of the State by investing in the technologies that would make commercial Victoria’s vast resources of brown coal. Instead, the reborn SEC will use the State’s balance sheet and subsidies to ensure the development of boondoggles such as offshore wind farms, producing intermittent power and utilising imported turbines, while overriding environmental considerations such as the adverse impact on listed migratory species.But this is the sort of policy that can seize the imagination of utopian central planners, when there is no clearly articulated national strategy based on geopolitics and competitive advantage. Instead, the field of national debate is occupied by the narratives of climate change and ‘visions’ of how Australia could, by sheer willpower, transform its economy and population into something more pleasing to the intelligentsia.

Another classic example is the recent paper from Deloitte Australia, Australia’s Hydrogen Tipping Point: The Urgent Case To Support Renewable Hydrogen Production, talking up the scope for a booming hydrogen industry in Australia, in which solar and wind farms make hydrogen for export. If this is such an attractive proposition to guarantee Australia’s prosperity into the future, why does the paper focus so much attention on capital grants, investment tax credits, and production credits? Our current exports of coal and gas require no such subsidies, and indeed their royalties underwrite the budgets of the Commonwealth, Western Australian and Queensland governments.

The focus on climate policy, because it is located in a global context, gives an illusory sense of reflecting a global understanding and a ‘helicopter view’ of the situation. In reality, the climate policy mindset is based on little more than a simplistic version of the ‘tragedy of the commons’, where our most important contribution consists of ‘doing our bit’. It therefore leads us to gestural measures to signal intent and commitment, embodied most notably by the commitment to the net zero emissions by 2050 target. This promise arose from political rather than scientific processes. It was dreamed up by veteran climate policy mandarin Christiana Figueres and a coterie of similarly minded women at a country house in Scotland.

‘Doing our bit’ is a sentiment suitable for a working bee at the local school, not one focussed on the national interest. Especially when, unlike neighbours, so many countries are unresponsive to our example and have their own reasons for pursuing a growth agenda.

In Africa and much of South-East Asia, food security is paramount.

Environmental issues can and should be a consideration in charting a path forward for Australia, but what we see in practice is climate policy accompanied by an unwillingness to identify its true costs. As Bjorn Lomborg told the Wall Street Journal in July 2022:

Achieving net zero globally by 2050 would cost more than $5 trillion a year for the next three decades, according to McKinsey. That would be one-third of total global tax revenue. If every American were to shell out more than $5,000 a year, it would only get the U.S. 80% of the way there by mid-century. Hitting 100% would likely cost more than twice that.

Bjorn Lomborg in Prague.
Photo: Radek Cihla

An accounting of the true costs would include not just the cost to a country rich in natural resource endowments, but the impact on those countries we count as friends, and the impact on the developing world through measures to prevent growth in energy supply and agricultural output. In Africa and much of South-East Asia, food security is paramount, and the achievement of energy security intensely desired. Rather than balancing or integrating these various considerations, we see a kind of monomania, with discussion limited to a very skewed version of environmental challenges.

It is not surprising that a tech leader like Mike Cannon-Brookes demonstrates just such a single-minded commitment to a transformational green vision. Be sure, Cannon-Brookes can and should be proud of what he achieved at Atlassian, a globally competitive software company. In the software industry, given sufficient financial backing, strategic vision and application of willpower can indeed be transformative. But this approach cannot be translated to a national level economic and energy strategy, and indeed should not be applied to the physical world at all.

‘Creative destruction’ in computing replaced IBM and Hewlett-Packard at the top of the Fortune 100 with Apple, Microsoft, and Amazon, and consumers were the beneficiaries. Creative destruction applied to our energy system just means the premature retirement of our most reliable base-load power stations, on the promise that, by an act of will, we can conjure up a linked series of replacements to achieve the same effect. This act of will requires upwards of $300 billion of scarce and increasingly expensive capital, much of it from taxpayers.

Betting our future on a massive program of acquiring new wind and solar energy plants, overwhelmingly from China, ignores the risk of further disruptions to the supply chain. We have all witnessed how global supply chains have been disrupted by COVID and now war. How can we manage this in a period of further de-globalisation, especially when critical rare earths and minerals will be in short supply? The re-shoring of manufacturing in the USA has been underway for a decade. It was championed by Trump, but continues under Biden. The sanctions by Biden and the rest of the West on individuals and companies supporting any form of manufacturing in China and Russia will have lasting effects. A vision of Australia being a country where we can succeed by carpeting our northern reaches with solar panels imported from China, in full knowledge they will need to be replaced in 15 years by that very same supplier, is not one accounting for supply chain risks.

President De Gaulle’s vision of French nuclear energy that included supporting the electricity grids of its neighbours was one kind of engineering and commercial challenge. By way of modern comparison, the Sun Cable scheme for Australia to supply Singapore with energy derived from Chinese solar panels, conveyed by 4,200 km of sub-sea transmission lines using increasingly scarce copper, is orders of magnitude more difficult.

Energy security is national security.

The average Australian today does not have to think about food security very much, but for most countries around the world it is of primary concern. As scientist and author Professor Vaclav Smil has pointed out, for the world in the 20th century to expand agricultural output so we could feed a greatly increased population was a tremendous achievement.

Smil also points out the overwhelming factor that enabled this was the application of fertiliser, the global supply of which overwhelmingly requires ammonia as a feedstock. Australia, which produces enough foodstuff to feed four times our population, makes a contribution to global food security in at least three ways: directly via exports, by exporting the natural gas that can be used to make fertiliser, and by exporting fertiliser made from our natural gas. The Yara Pilbara Fertilisers plant in north-west WA is one of the largest ammonia production sites in the world. Was any of this considered when the Albanese Government signed Australia up to the Global Methane Pledge? This is another very recent invention—developed by the Biden administration and the European Union—which effectively targets agricultural sectors here and around the world. It does so either directly via its restrictions on the beef industry, or indirectly for its inevitable effects on the natural gas and fertiliser production. We know that restrictions on fertiliser use led directly to policy-induced famine and economic collapse in Sri Lanka, and have led to massive farmer protests in the Netherlands and across Europe.

Energy security is national security. Australia cannot have the economic and manufacturing base required to sustain our necessary defence posture without reliable and affordable energy. The strategic implications of our proposed energy transformation have been masked by its embedded claims that what emerges will be just as reliable and just as affordable as what it replaces. This is wishful thinking.

A base-load power station operates, and needs to operate, 24 hours a day, seven days a week. Supplementing intermittent sources of energy with batteries and pumped hydro simply introduces further constraints and unnecessary complexity. A combination of unreliable supplies cannot substitute for one that is inherently reliable.

Our global role in providing energy security also needs to be recognised. It is nearly 70 years since Australia entered into a long-lasting partnership with Japan, which has a tremendous manufacturing sector and a highly skilled population, but is bereft of energy-dense fuels. By directly supplying them with coal and gas, and indirectly supplying the fuel rods they need for their nuclear power plants, we have underwritten their national security. It is time to see these exports not just for what they contribute to our export bottom line, but also for their role in enmeshing us in a network of friends and allies, which must be at the centre of our strategic thinking.

As China has become more belligerent, we are working harder to build security alliances with measures such as the Quad, linking Australia to the USA, Japan, and India. The strategic and defence elements of this alliance cannot be separated from the consideration of food security and energy security.

Right now the Japanese customers and their Government are deeply concerned that the Albanese Government is considering arbitrary and unpredictable quarterly restrictions on the export of LNG, which could force the breaking of long-term contracts that underpin energy security. To do so would create a sovereign risk event, and would be no way to treat an ally.

It is well known that China continues to build coal-fired power stations at a great rate, but Japan has also been moved to open new plants. Japan’s biggest power generator Jera last year switched on a new 1,070MW power station in Taketoyo in Aichi Prefecture, designed to alleviate electricity crunches in the summer and winter. As The Japan Times noted, “It is a rare example of a new coal power plant being built in a developed country”.

The broader objective is not so much decarbonisation as it is degrowth.

The new Taketoyo coal-fired power station in Aichi prefecture.
Photo: Jera

Geopolitical analyst and strategist, Peter Zeihan, identified that Australia could be among a ‘handful of winners’ from deglobalisation, and what he sees as the secular decline of a China hamstrung by its inability to access Western technology, and an ageing workforce. Zeihan’s argument is that, economically at least, it does not matter who wins the Russia/Ukraine war, as the economic base of both countries is sadly being destroyed either directly by missiles or indirectly by sanctions.

This is a terrible time for the world, but to govern in our national interest is to consider what it means for us. Zeihan advises that the best response would be to move locally produced raw materials up the value chain, and pivot from China to a greater range of South-East Asian countries. Neither is straightforward. Specific policies must be examined in this light. It is no good asking for a domestic gas reservation if it is in the context of blocking new gas developments, as the governments of Victoria and NSW have done, and the Greens demand at the national level. Neither consumers nor industry will benefit if the fight is only over declining supplies, or a raid on those promised to our trading partners. That is a scenario redolent of Mad Max II, not a strategy reflecting our resource bases and global alliances.

No one calling for a national gas reservation strategy should be taken seriously until they are willing to address supply side constraints, including red tape, interminable approval processes, and the chilling effect of price interventions on new investment. Victoria and NSW are effectively calling for gas in Queensland and WA to be set aside for the benefit of their industry and consumers, even when they have resources within their own borders to address supply challenges. This is not an approach in the interest of the nation as a whole, but rather a beggar-thy-neighbour strategy which will only induce Queensland and WA to withdraw even further from the national markets for energy.

Similarly, adding value to natural resources in Australia would mean first of all acknowledging that we should continue to develop those resources, and secondly that we must do so in a way that makes the output competitive on the world markets. The signs are not good. The Albanese government is currently legislating a $15 billion National Reconstruction Fund. Now it remains the case that Governments are not good at picking winners, but other things being equal winners are more likely to be found in industries already successful on the world stage. Instead, the Greens have ensured the necessary legislation will not pass unless it specifically excludes projects that involve coal or gas.

Development of a true national strategy would give appropriate consideration to environmental considerations, including climate change. If (for real or imagined reasons) we as a nation wish to decarbonise while still having domestic energy security, then nuclear energy must be on the table. If restrictions on exports just mean our trading partners seek fossil fuels from other countries such as Indonesia—with no or negative net effects on global emissions—then we should double down on providing what they need.

All strategies require balancing multiple considerations. That climate activists, on the one hand, say the climate change risk is the greatest challenge facing mankind, yet on the other deny a role for nuclear, suggests a broader, unstated objective is in play. It seems more and more apparent that the broader objective is not so much decarbonisation as it is degrowth, the systematic lowering of living standards in the West, and the maintenance of the already limited standard of living in the developing world.

It is time to articulate a national strategy that has due regard for energy security, food security, national security, and the structure of our economic base as it is and realistically could be. Then we would be in a position to answer Jim Molan’s call for a National Security Strategy. Such an approach would address the grave challenges we face, honour our commitments to our friends, and also allow us to make the most of our opportunities.

This article from the Autumn 2023 edition of the IPA Review is written by IPA executive
director Scott Hargreaves.