For the first time, futures oil prices in North America recently fell into negative territory following a 30 per cent drop in global demand for crude oil and refined petroleum products because of lockdowns. While suppliers have agreed to a 10 per cent production cut, such measures are unlikely to reverse the price free fall. In the short term, we’ll welcome lower prices at the bowser, but this black swan event should ring alarms.
A perfect storm is brewing for a nation with a longstanding bipartisan hands-off approach to energy markets and policymaking. Prolonged low prices will have a significant effect on political stability in many large oil-producing countries, which rely heavily on those revenues. There may be significant geopolitical ramifications in the long term, particularly in the Middle East and parts of Africa.
Australia’s energy insecurity is calamitous. Despite numerous warnings, our liquid fuel reserves amount to three weeks’ supply of petrol, diesel and aviation fuel. Energy Minister Angus Taylor’s remedy is to buy cheap crude and store it in a US government-owned strategic petroleum reserve, effectively outsourcing our fuel security. This accounting trick may allow for offshore reserves to be counted towards Australia’s International Energy Agency-mandated fuel reserve tally. Canberra has been in breach of this requirement for years, consistently holding far less than 90 days of net oil imports in emergency stockpiles.
Taylor’s plan does not reduce our exposure to future oil shocks. First, Canberra is assuming it can rely on Washington to divert strategic resources — potentially at times of geopolitical instability — to a foreign market. Japan had a similar arrangement before the 1973 oil crisis, only to find out that when Middle Eastern supplies were cut, fuel stockpiles were diverted to the US and Europe. Australia cannot assume mateship will trump the US national interest.
In any case, there’s a second challenge. This product is not refined and would need to stop over in Singapore or South Korea (which refine most of Australia’s fuel). Taylor’s solution relies on the assumption that the Malacca Strait, the broader South China Sea region and sea lines of communication between Asia and Australia are free from security threats. And Canberra cannot sidestep the competitive East Asian maritime sphere and import crude directly from the Middle East. Australia’s refinery infrastructure is practically obsolete. The ongoing closure of refineries puts us on track to be fully reliant on imported fuel by 2030.
Recently, Caltex announced the closure of Brisbane’s Lytton refinery, leaving us with three. Two are on the east coast and are facing an uncertain future. ExxonMobil’s Altona refinery is for sale, with China’s Sinopec eyeing a purchase. Viva Energy’s Geelong refinery will soon close for maintenance. If markets are left to run their course, as they have been, Australia will have one refinery: BP’s Kwinana in Western Australia. This will leave us dependent on continued geopolitical stability in countries where our crude imports are refined, mainly Singapore.
Any serious energy security solution from Canberra needs to at least maintain today’s refinery capacity, develop onshore liquid fuel reserves, and/or fully commit its energy policy strategy to fuel substitution away from oil. A third issue with Taylor’s Band-Aid solution is there appears to be a failure to grasp what energy security means. Of course, it comprises the two market forces, supply and demand. Yet the government remains focused merely on the supply component.
The outlook is perhaps even more worrying on the demand side for our export fuels. Fanfare recently accompanied the news of Australia becoming the largest liquefied natural gas exporter. Revenue from LNG reached $51bn last year, placing it second to iron ore among the country’s resource and energy exports. The bad news is that our LNG export prices are linked to the price of oil.
With global oil prices at their lowest in 20 years and trending down, LNG projects are likely to go bust without significant government intervention, a taboo since the days of energy minister Rex Connor in the early 1970s. Global energy giants are likely to walk away from LNG projects deemed commercially unviable. Already in Australia, more than $80bn of investment decisions have been delayed by the collapsed oil price. Ultimately, the government may need to step in.
Our energy insecurity is confronting but it presents an opportunity. While enjoying a reprieve from high fuel prices, Canberra should develop a pragmatic strategy. For the supply side, this may include accelerating the substitution of fossil liquid fuels with alternatives, supporting operation of local refineries, building an onshore strategic fuel reserve, and establishing measures with Singapore to guarantee supply of refined fuels in times of crisis. In terms of demand security, it may be prudent to adopt a more proactive and long-term approach to regional and global trends, and treating our energy reserves as strategic and not merely primary commodities. An energy security solution must be at the top of Canberra’s agenda before it is too late.
Extracted from The Australian