Chapter 2 - Economic Impact
The macroeconomic impact
The Varanus Island incident caused significant disruption to
economic activity in Western Australia causing interruption to both gas and
electricity supplies. As the explosion occurred in June, and gas supplies are
expected to be fully restored in December, the impact would have been
concentrated in the June and September quarters of 2008, with a smaller effect
on the level of output in the December quarter. The impact on economic growth
in the year 2008-09 will depend on the extent to which the impact on output is
only temporary. (Firms who responded by bringing forward maintenance and annual
leave may have higher output in late 2008 and early 2009 than if the incident
had not occurred.) The Western Australian Treasury is optimistic on this,
telling the committee:
...the second half of 2008-09, we would expect economic growth to
be probably a little bit faster than it would have been because things will
The macroeconomic impact will never be precisely known. The
simultaneous impact of the global financial crisis makes it harder to attribute
any economic slowdown observed in WA to the impact of the explosion. The
committee has seen a number of estimates of how much the explosions weakened
At the hearing in Perth in early October, the Western Australian
Treasury told the committee they stood by their estimates from August.
These were as follows:
The June 2008 disruption in gas supplies...is expected to cost the
Western Australian economy around $2 billion in Gross State Product (GSP)
terms, with roughly half of this impact in each of the June and September
quarters of 2008. This translates to approximately a 0.5 percentage point
reduction in estimated GSP growth in 2007-08, from 7.5% at budget-time to 7.0%.
Forecast growth in GSP in 2008-09 remains unchanged at 6.25%,
although this growth will occur off a lower base as a result of the gas supply
disruption (the level of economic activity for 2008-09 will be 0.2% lower than
forecast at budget-time). Importantly, the impact of the disruption is expected
to be temporary, evidenced by the recent return of a third of the lost
production, with forecast growth in 2009-10 revised upwards to 6.25% (from
5.75% at budget-time) to account for the expected rebound from the domestic gas
The then Western Australian Treasurer felt in July that 'while
there is no doubt that the incident at Varanus has caused significant
disruptions to particular firms, the overall health of the economy is expected
to come through this disruption well.'
The Reserve Bank of Australia estimated that:
Overall, the disruption is expected to result in a temporary
reduction in national GDP growth of around ¼ percentage point, spread across
the June and September quarters.
As GDP is around a trillion dollars, a ¼ percentage point
represents about $2½ billion, so the Reserve Bank estimate is broadly
consistent with that of the Western Australian Treasury.
The Chamber of Commerce and Industry of Western Australia (CCIWA)
also gave estimates of the impact:
A CCI survey of WA industry estimated the gas crisis has cost
business and industry $2.4 billion in lost turnover during June and July
alone...and it is likely that the flow-on effects will continue to impact the
economy for some time... Some 16.6 percent of respondents indicated that their
business had been directly affected by the outage, while a further 33.2 percent
had been indirectly affected. Of those businesses impacted by the gas outage,
their production declined by an average 30.6 percent.
A much smaller impact is estimated by the Australian
Attorney-General's Department and Geoscience Australia using the Critical
Infrastructure Protection Modelling and Analysis Program (CIPMA) and a general
equilibrium model from Monash University known as 'TERM ('The Enormous Regional
Model'). They concluded:
...the impact on the Western Australian gross state product is
approximately just over $120 million in the period 2008-12. At the national
level, the GDP loss from the incident is almost $300 million or 0.03% of GDP in
this period... The effects of the event appear to ‘wash out’ of the economy
within the two years. The key message from this CIPMA analysis is that the fast
response and injection of investment funds rapidly returns the economy in all
regions to the business as usual path.
As well as methodological differences, the CIPMA team explain
their smaller estimate by the fact that they are using more recent data and the
economy has recovered more quickly than earlier expected.
Real household consumption expenditure in Western Australia
slowed significantly in the June quarter. But given that it still increased
slightly in WA, whereas it fell in New South Wales, Victoria and the Australian
Capital Territory, it is hard to say how much of the slowing in consumption was
due to the Varanus island incident rather than national (or global) factors.
September quarter data will not be available until 3 December. The monthly
trend increases in nominal retail sales in WA held up quite well in the
which augers well for an increase in real consumption.
Real private sector gross fixed capital expenditure (i.e.
investment) was very strong in Western Australia in the June quarter. On the
other hand, there was a fall in imports. While weaker imports would often be
interpreted as a sign of weaker domestic demand, it is implausible that the gas
disruption starting in early June could have affected imports this quickly.
Export volumes also fell in WA in the June quarter. As with consumption, the
picture will become clearer once the September quarter data are released on 3
There is no sign of a large impact on employment in Western
Australia, which grew in June, July and August after a flat period in the
early months of 2008. Employment in WA fell slightly in September but then grew
again in October, to reach 4 per cent higher than in May. The unemployment rate
declined from 3.6 per cent in May to 2.7 per cent in August and 2.2 per cent in
October. This is consistent with the view expressed by business to the
The skills shortage meant that most industries have been
reluctant to lay off staff during the period of the gas shortages...
I think the loss of employment was relatively low.
We certainly surveyed the membership to find evidence of people
being stood down...and there really was not any evidence to suggest that was
However, while few workers have lost their jobs, it was reported
that some have been stood down or required to take annual leave at times not to
It was suggested that around 2 000 workers may have been affected in the
The economic impact on industries
A model used by the Western Australian Treasury suggested:
The industries that were worst affected were the energy
intensive mineral processing industries—alumina, nickel, mineral sands; those
kinds of industries...Some of the tourism industries were badly affected; food,
drink and tobacco, and also wood and paper products...Even though it [the model] takes
into account second and third round impacts, it really is that big first round
impact that dominates.
The CCIWA suggested that 'businesses operating in the
manufacturing industry were hit hardest...'.
Chemical production, such as ammonium nitrate, was particularly
affected, with some plants forced to close. A major food manufacturer, Vesco
Foods, closed for a week.
It was reported that brick kilns were closed down for a period, with a flow‑on
Bottling operations were disrupted by a shortage of CO2. It was
reported that some Western Australian businesses with national operations
replaced local product with product from the eastern states.
Hotels reported that they faced difficulty getting clean linen as
commercial laundries had their supply of gas cut.
Responses included cutting back on use of linen (e.g. tablecloths) and
using guest laundries within hotels to wash sheets. As gas started to become
available, prices charged by commercial laundries were temporarily higher than
usual. During this period hotels generally absorbed these costs rather than
attempting to pass them on.
Some swimming pools and saunas were forced to lower temperatures,
or in some cases close, and a fifth of local governments reported reducing
casual staff in recreational facilities. 
Tap beer was affected by CO2 shortages.
The impact on hotels became an especially crucial issue due to
the Australian Tourism Exchange being held in Perth from 14 to 20 June 2008
with over 2 000 international delegates. This raised concerns over reputational
risk. However, in the event, the delegates seemed understanding of the need for
some restrictions and there were no complaints.
The Australian Hotels Association (Western Australia) is particularly
concerned about 'the long term effect of customer dissatisfaction, lost
business and revenue opportunities and damaged business reputations'.
However, while they came close, no hotels turned away customers as a result of
the gas shortage and there appear to have been no job losses at hotels or
The majority of hotels responding to a survey said that 'customers were
satisfied that the hotels were doing the best that they could'.
By the time of the committee's hearings in early October, the
situation in the tourism industry was back to normal.
One benefit that arose from the shortage was that some hotels realised that
there were cost savings and environmental benefits in using less linen where
Some mines had to cut production due to lack of power.
According to CCIWA:
Almost 19 percent of mining sector respondents have been
directly affected by the gas crisis, while a further 41 percent have been
indirectly affected. On average, production among these affected businesses has
declined by 26 percent.
It was reported that other mining operations were disrupted by a
shortage of sulphuric acid used to clean ore, or a shortage of explosives
and the some producers brought forward maintenance.
The Insurance Council of Australia told the committee that the
impact on the insurance industry had been relatively modest:
At the present time [late October]—and I should stress that
claims will continue to come in for some time—the aggregate of claims made to
the general insurance industry is $75 million. That is perhaps a smaller figure
than the media have led others to believe...Seventy-five million dollars as an
aggregate loss is very small if you compare this to, for example, the Longford
gas disruption in Victoria some years ago.
The relatively small impact reflected most companies choosing not
to take out business disruption insurance and in some cases policies only
allowing a claim if gas supply was totally cut off rather than just reduced or
subject to high deductibles.
Farmers were affected as fertiliser became scarce or more
It was reported that abattoirs were affected by a shortage of liquid CO2
used for killing pigs.
Vineyards were affected by a shortage of CO2 for their bottling
Logging operations, and associated transport companies, were disrupted as mills
were forced to close.
Construction and maintenance activities were impeded by a
shortage of asphalt.
Food retailers normally selling to workers in some of the above
industries who had been stood down, were indirectly affected.
Some shopping malls shut lifts and turned off lights to conserve energy.
Research into carbon capture at Curtin University was disrupted
by a shortage of dry ice, which could jeopardise its ongoing funding.
The regional impact
Views differed about which regions of Western Australia were the
most affected, although the majority view seems to be the south west:
...the failure of the marketplace to provide adequate supplies for
industry was stark and caused great expense and dislocation to the south west
business community and industry in particular.
Disruption was caused across the state...If there was a section of
the state most severely impacted up, and it is all relative, it would be the
...the goldfields would have been more impacted, proportionately,
than the south west.
...impacts from the crisis were felt from the Pilbara down to the
south west. I acknowledge that there were particular impacts in the south west...probably
because some of the gas consumers there were significant employers and were
hard-hit. Also, there were a number of companies in the Pilbara, for example,
which basically shut down and, in at least one case that I am aware of, are
still shut down.
From the local government perspective directly, I do not think
that you can pick out any particular area.
Larger residential and light industry distribution [most
affected by the crisis] includes the Bunbury, Busselton, Geraldton and Perth
A model used by the Western Australian Treasury suggested that
given which industries were most affected:
... you really look at which regions have got those industries,
and the south west has the biggest share, with alumina and mineral sands. That
was the worst affected area. Other than that, the incident itself had a fairly
large economic impact on the Pilbara. There were also businesses in the
goldfields, and obviously a lot in the Perth statistical area. There are
bananas up north... It was fairly widely distributed, but the south west was
quite a fair way in front in terms of regional impacts.
The Insurance Council, when asked the source of most claims,
...predominantly from a mixture of businesses and commercial
operations in the south west part of the state and around Perth. There are a
reasonable proportion of claims in there from mining operations and
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