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The Dilemma Plaguing Israel’s Gas Bonanza

5:35 PM, Jun 7, 2013 • By DANIEL DORON
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When Israel finally discovered a bonanza of natural gas about five years ago everyone was happy. But then fierce arguments broke out—and rightly so.

Plentiful cheap gas could revolutionize the Israeli economy, but it could also lead to some nasty unintended consequences. The concern was that is Israel could contract a bad case of the Dutch Disease, where, in Holland, a flood of income from oil exports hiked its currency's value and made its manufactured goods uncompetitive, hurting its economy.

The other concern is that, in Israel, a flow of tax revenues from gas exports could strengthen the control over the economy of a meddlesome and profligate government that impedes Israel's economic progress.

So when the largest holders of Israeli exploration rights, Noble Energy (U.S.) and its Israeli partner Delek Energy demanded the right to export over 50 percent of Israel's gas reserves right away, they were vigorously opposed by most independent energy policy experts. It also provoked a public outcry against a politically motivated giveaway of resources vital for Israel's economic growth.

This latest battle followed another nasty campaign Nobel and Delek (N&D) conducted against an independent commission examining the allocation of benefits from Israel's energy discoveries. When gas was actually discovered, Israelis learned to their utter consternation that N&D and other explorers had been granted a mind boggling 70 percent share of income from exploiting Israeli natural resources by inept Israeli bureaucrats. It left Israel with nary any income from its resources, once additional tax concessions the explorers received were added. This was rectified by the commission. It set the government take t at about 60 percent—a bit lower than the 70 percent average in OECD countries.

N&D, a near monopoly, has strong political clout (as do all large Israeli businesses-monopolies). So it is not surprising that its demand was recently supported by a government commission made up mostly of regulators and government bureaucrats. The commission held its deliberations in private for a good reason as was just discovered when its protocols were finally disclosed. It turns out that eager to secure a huge windfall of gas export taxes for government (so that they could further extend a sacrosanct failing welfare state) it did not seriously try to determine what realistic reserves Israel possesses or whether they are really sufficient for the country's own needs over the next few decades. It even pushed for larger gas exports than N & D expected.

The commission did not even raise the question of whether Israel should keep most of its reserves as protection against its strategic energy vulnerability. Israel gets oil from distant and unstable sources; supplies can be interrupted by a determined enemy, as occurred in 1973.

Nor did the commission examine what future economic benefit Israel could derive by replacing expensive and highly polluting oil with cheap and easily available gas. It misleadingly extrapolated gas consumption trends from the present minimal use of gas by an Israel that currently has no proper gas infrastructure, and lacked until now a secure and nearby supply source.

The commission also totally ignored the immense contribution the availability of cheap accessible gas can make to Israel's economic growth. Cheap gas can enable Israel to cut sharply its competition inhibiting, highly inflated production and living costs that are imposed by the monopolies that dominate its economy. It can make its low productivity economy more efficient and competitive.

With cheap and secure gas supplies, Israel could also develop an innovative petro-chemical industry. Israelis have repeatedly demonstrated their exceptional innovative skills. They could help develop solutions that will minimize the world's dangerous dependence on oil, which mostly comes from very unstable sources and enables hostile regimes to use their huge oil profits to wage war on the West.

For all these reasons, it seems far more prudent for Israel to strictly limit exports of gas for now and preserve its reserves for the more economical purpose of expanding and improving its economy, especially in manufacture and transportation.

If cash is urgently needed for developing the newly discovered fields, as N&D claims, surely there are other financial sources for such a profitable venture than exporting vitally needed resources for short term gain. Eventually, when Israeli gas will be absorbed by its developing energy market, a better estimation can be made of what its reserves really are and what proportion should be kept before allowing exports.

Export advocates use the U.S. example to support their case. But there is no doubt the U.S. possesses indeed huge reserves that assure it energy independence even if it exports a great share of them. The U.S. also enjoys competitive energy markets that can be relied on to price and allocate resources efficiently. In Israel prices are "negotiated" by the semi-monopolistic gas producers with mostly large monopolistic users, like Israel's Electric Corp.

Long-term strategic and economic consideration must therefore curb N&D’s rush to benefit from speculative, monopolistic profits. The decision as to whether to export, when and how much must be carefully assessed, for otherwise not only Israel, but the world’s security and economy, could wind up paying a dear price.

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