Relax, Natural Gas Is Just Money

What remains to be ensured is that the state makes good use of the profits. Israel’s weak point was and remains using its resources wisely to assure a better future.

Reuters

This week was the deadline for the Locker Committee to publish its recommendations on the defense budget for the next five years. The recommendations are widely expected to profoundly change pension arrangements in Israel’s defense establishment, thereby altering the Israeli army and defense budgets for generations to come.

But the report was not published. Why? The Prime Minister’s Office was deeply preoccupied with the fiasco of its failure to push the new arrangement governing Israel’s gas discoveries through the Knesset. So the PMO decided to defer the presentation of the Locker Committee's recommendations.

It is the Israeli rule that urgent trumps important. In this case, that rule took an interesting turn; the important trumps the equally important, as the debate over the future of the Israeli gas scene turned emotional. It is high time to return the discussion to rationality.

1. The Israeli public will share the profit.

The Sheshinski Committee ruled that the state would get a roughly 60% share of the gas companies’ profits. Therefore, the scenario of a predatory gas monopoly that would suffocate the economy by overcharging for gas has its advantages. If the gas companies earn money hand-over-fist, the state will too. In other words, the public will get its share of any surplus profit that the gas companies make.

That slightly mitigates the concerns about the Noble Energy-Delek gas monopoly, but not by much. After all, the state’s goal isn’t to maximize its tax revenues, but to advance the economy. If the state earns a lot of money at the expense of costly electricity and diminished industrial profits (which depend on the price of gas,) we will ultimately all lose. Also, the state’s profit does not eliminate the concern that the gas monopoly and economic crisis are damaging to Israeli democracy.

2. Israel chose not to focus on profitability.

In principle and in practice, Israel could have ended the debate over gas before it even began, if it had made a strategic decision that gas is just money; it doesn’t need to be used, just to generate profit. In other words, Israel could have decided to keep none of the gas for its citizens and allow the lot to be sold on the free global market.

In that case, questions about the creation of a natural gas monopoly or how much of the gas we should keep and how much should be sold (current decision: keep 60%, export 40%,) would have been moot. The goyim would be the ones buying it anyway.

Israel would have been left with a single strategic decision – how much of the profit the state would get, so the people could also profit from the exploitation of this natural resource. And that strategic decision has already been made, after a fashion, when the Sheshinski Committee ruled that the state would get up to 60% of the profit on the gas’s sale.

Some argue that the gas serves Israel’s energy independence. Others think it will help our environment because it’s a cleaner energy source than oil and coal. Both issues would be answered by turning the gas into money. A rich state can buy energy in almost all situations and the environment would do much better if some of the gas income were to go to the development of renewable energies, rather than using the gas for energy.

3. Yet price does matter

Israel decided it wanted to use the gas, which forces us to deal with the issue of the power of the gas monopoly, and the price at which it sells the gas to local buyers – chiefly, the Israel Electric Corp and heavy industry.

But there are actually two different questions here. Whether the monopoly should be tolerated or dismantled and, if it is to be tolerated, how to prevent it from abusing its power through price controls.

Regarding the first question, it’s apparently too late. The state decided not to break up the gas monopoly (Noble and Delek acting together,) maintaining that , dissolution would simply lead to a secretive cartel, rather than competition. That is a great shame. One can only sigh at the memory of how the Israeli gas economy behaved when Egyptian gas provided an alternative: Israeli gas cost a lot less at the time, yet the Israeli companies did not balk at selling to the Israel Electric Corp and the rest of the local pack. If anything, exploration for gas picked up steam. (From which we may conclude that the gas companies’ threat that too low a price would compel them to stop looking for more gas, is empty.)

Anyway, the monopoly is evidently safe, so the remaining question is over controlling prices. There are grounds to suspect that the present price of gas in Israel is high, not only because it costs much more than during the era of competition with Egyptian gas, but because the return on operating the Tamar gas field is especially high.

On the other hand, there are weighty claims that Israel can’t impose both low prices and heavy regulation if it wants to encourage more exploration for fossil fuels in its territorial waters, and to find buyers for smaller fields (Karish, Tanin) found by the current explorers.

At what price are those interests balanced? Nobody knows, so it’s as well that the state decided to link the price of gas in Israel to the market price abroad. Put otherwise, Israeli customers won’t pay more for the gas than foreign customers do. It follows that we will effectively import a competitive price for the gas through exports. Until that happens, though, it is well that Israel revisit the prices that the monopoly may charge, and lowering the price – possibly by 10% to 15% - looks right and proper.

4. We have to make up our minds already.

Based on the assumption that, come what may, the state gets 60% of the gas companies’ profit, the only major issue remaining is the precise price of the gas. It is high time that decisions were made. Exploration ground to a halt years ago, partly due to the decrease in global gas prices and partly because of the uncertainty regarding Israel’s gas policies. At the end of the day, we need to keep in mind that the gas is just money, and what matters is how we share that money. That issue has already been settled. It also remains to be ensured that the state makes good use of the profits in the future. Israel’s weak point was and remains using its resources wisely to assure a better future. That is the heart of the matter.