ByDr Liam Wagner, Professor of Economics, Griffith Business School
The 2018 Federal Budget includes incentives for the energy sector with the further development of coal, oil and gas. However, a lack focus on oil security diverts energy policy debate away from the availability of our energy supplies and onto back-pocket affordability. Oil supplies barely rated a mention in the 2018 Budget and most notably there will be:
- No additional funds to acquire the strategic storage of oil
- Energy Security Board to conduct regular security assessments, which may include oil and gas.
While the geopolitical chess game grows in its complexity, South Korea, Iran and disputes in the South China Sea will become more important to everyday cost of living. Australia imports 75% of its petroleum needs and the vast majority of its refined gasoline and diesel.
Most notably, South Korea is our largest supplier of refined petroleum products, which travel via the South China Sea to reach our shores. Furthermore, around 30% of the world’s crude oil supply travels through the Strait of Hormuz, right next door to Iran. If one or all of these hot spots became the centre of regional security concerns, we could see $10/L petrol prices and the rationing of petrol.
Oils ain’t oils, there’s a looming crisis.
Importing the majority of our oil shouldn’t be a problem with alternative supplies, like those mandated by the International Energy Agency (IEA), who require a 90-day supply stockpile.
However, since 2004, it has been widely known that the retirement of oil refining capacity could be a looming problem for Australia’s energy security. The closure of the Shell Clyde refinery in 2012 marked the end of Australia’s ability to comply with the 90-day IEA supply requirements. Furthermore, the ageing fleet of oil refineries have struggled to compete with SE-Asian competitors, and our continued reliance on imports shows its strategic frailty.
Despite repeated warnings via the 2004 Energy White Paper and the more recent 2016 Defence White Paper, Australia has not maintained a sufficient oil reserve for 80 of the last 91 months. Despite the recent rediscovery of this issue by members of the government, little has been done in the past 14 years to increase our strategic oil supplies.
Why should I care?
Because everywhere you go and everything you eat requires oil.
Unfortunately, we have still yet to find a replacement for the 120+ products derived from a barrel of oil, let alone electrified all road transportation. Oil will be a significant factor in everyday life for some time and, without the proper management of energy security, we may be in some trouble. The continued inability to maintain adequate oil supplies could result in $10/L petrol prices, greatly affecting food prices and the availability of medication.
What should the government do?
While increased reporting of oil stocks and excess storage capacity by producers, marketers and large users will improve our ability to release supplies during a crisis, there are still four key recommendations which could be implemented in Australia:
- The Australian government can divert funds from fuel excise charges to build oil storage;
- Develop an Energy Security Ombudsman;
- Adopt the French model of requiring petrol companies to have an additional 10-15% storage above market requirements;
- Require greater strategic storage by large users of oil products.