Oil, energy and national security…
Prelude to collapse: Australia’s oil fuels vulnerability
Scenario 1: In its conflict with Israel, Iran closes the shipping channel in the Strait of Hormuz. Scenario 2: China invades Taiwan, the US enters the conflict and the South China Sea is closed to shipping. In either of these circumstances, what happens to Australia’s oil supply chain on which we rely to power the nation?
IT DID NOT receive much attention beyond the geopolitical thinkers, however the consequences for Australia’s oil supply and the effect of a widened conflict on global oil prices—had Iran entered the Israeli-Palestinian conflict of 2023 and closed the Strait of Hormuz or attacked tanker traffic transiting the Strait—again brought attention to Australia’s oil vulnerability.
At the time of writing the war between Israel and Hamas-Palestinians is raging and it is already affecting fuel prices. The US publication, Foreign Policy, summed up the situation:
In the wake of Hamas’s weekend attack, European natural gas and global oil futures shot up by 14 percent and 4 percent respectively, reflecting wider uncertainty and fears of an intensifying conflict.
Oil shot up because there are worries, again, that Iran might close the Strait of Hormuz, the chokepoint for nearly a third of seaborne oil. Natural gas prices went up firstly because Israel shut down a big offshore production platform in missile range of Gaza, and secondly because a pipeline in the Baltic mysteriously developed a hole, which Estonian officials attributed to ‘external’ actors.
How a closure of the Strait of Hormuz or a conflict in the South or East China Sea would affect Australia’s liquid fuel supply would depend on where we are sourcing our oil fuel supplies from at the time. Were either to eventuate we should expect an escalation in global fuel prices that in Australia would flow on to goods, including food, and exacerbate the current cost of living crisis affecting Australian households. Depending on its duration, the conflict could bring further impacts that would profoundly affect how we live in this country.
The trend in these possibilities over the years underlines the vulnerability of Australia’s reliance on oil-based fuels. The vulnerability started to receive increased attention as the geopolitical situation in the Western Pacific started to deteriorate with China’s assertion of power in the South China Sea. Scenarios developed by the Australian Parliament, the Defence Department, Engineers Australia and the National Road and Motor Association, as well as by academics and journalists who focus on resource and national security issues highlight that crises can happen with little warning and would leave us with almost no time to adapt to a major disruption to our oil fuel supply chain. Their scenarios look at the shorter term impacts and national security rather than any slower, longer-term supply chains collapse due to the peaking of production of regional or global oil extraction and the consequent price rises as supply can no longer adequately meet demand.
How vulnerable is Australia’s oil supply?
A 2019 report by the Defence Department’s director of preparedness, Cheryl Durrant, and Engineers Australia identified threats to the nation. These include:
- conflict between China and the USA; this would likely be in the South and/or East China Sea and possibly in the wider South West Pacific region
- climate change and natural disasters
- the rise of nationalist governments
- pandemic.
The report was both prescient and accurate in identifying natural disasters. Its warning preceded the devastating 2019–2020 Black Summer bushfires and forecast the Covid-19 pandemic around a year later. It is its identifying a clash between China and the US that is most relevant to the security of Australia’s oil fuel supply, most likely over China invading Taiwan. This could strangle our trade routes and supply lines. Were Australia to assist the US, kinetic conflict could be preceded by or come simultaneously with a cyber attack on Australia’s communications, economic, energy, medical and transportation infrastructure. Cyber vulnerability has risen to prominence this past decade among Australian cyber-security and national security interests as a major component of our threat environment.
In a conflict, China could deny access to the sea lanes that the Australian economy relies on for its foreign trade and importation of liquid fuels. Speaking to The Australian newspaper a few years ago, Andrew Hastie MP said that our imported diesel and jet fuel reliance on South China Sea shipping lanes puts Australia in a vulnerable position in that China could coerce Australia by threatening to disrupt our liquid fuel supply. Blackmail, in other words. The precedent is China’s blocking of Australian food, timber and coal imports during its 2021 economic warfare against Australia.
Expect rationing, price increases
Diesel fuel is critical to the trucking industry as well as to intercity rail transport, to private vehicles and places using diesel generation to make electricity. Australia’s supply chains rely on a continuous flow of diesel fuel. Without it, the trucks stop, goods are not delivered and nor is food, medicines and other vital supplies. Farms, too, rely on diesel for their machinery and for transporting their produce to market.
Conflict between China and the US in the near-China maritime environment might not completely cut off Australia’ oil fuel supply, however it would likely severely restrict it. It would also increase demand from oil suppliers away from the conflict zone, forcing up the global price of oil which, in turn, would boost the price of everything that uses oil in its manufacture and transportation.
An unhealthy reliance
Australia is largely reliant on imported liquid fuels. Government figures for oil imports in 2019–20 identified that our main sources of automotive petrol were:
- 33% from Singapore
- 29% from South Korea
- 9% from the US.
Our main sources of diesel fuel were:
- 24% Singapore
- 19% Japan
- 16% China.
Our main sources of crude oil were:
- 21% Africa
- 13% United Arab Emirates.
In evidence to the Defence White Paper 2016, the Australian Institute of Petroleum said that 50 percent of Australia’s diesel and 60 percent of our jet fuel came through the South China Sea. Around 58 percent of crude oil came from the Asia Pacific. A conflict or substantial stand-off in the South or East China Sea would have disrupted that supply.
A conflict could see nations supplying Australia react to the uncertainty by ceasing to supply Australia with liquid fuels, preferring to retain supplies for their own national security. The precedent for that was nations ceasing the export of grains during the food crisis of 2007–2008.
It might be possible to get by on fuel supplies that do not transit the South China Sea, however it is likely that to do so fuel rationing would be necessary. Imports of crude oil from Africa and the United Arab Emirates could be increased, however Australia’s refining capacity has dwindled to just two refineries, creating a bottleneck in fuel processing and distribution.
At the time when the Defence White Paper was in production, 2015, Australia’s total stockholding of oil and liquid fuel comprised:
- two weeks of supply at sea
- five to 12 days supply at refineries (of which only two remained by 2021, the others having been closed by the petrochemical corporations as uneconomic or converted into fuel import hubs)
- ten days of refined stock at terminals
- three days supply at service stations.
(Source: Engineers Australia to a 2015 Senate inquiry into the Australia’s energy resilience and sustainability).
In 2020, an Australian Parliament assessment of liquid fuel supply found reserves to consist of:
- automotive gasoline-25 days
- diesel-20 days
- aviation fuel-143 days.
Why it matters
The Canberra Times in late 2021 reported then-Energy Minister Josh Frydenberg emphasising the situation by saying that liquid fuel including petrol, diesel and jet fuel accounted for 98 percent of Australia’s transport fuel and 37 percent of our overall energy use.
Even a limited shortfall in fuel supply would likely affect all of us and possibly bring limits on movement as well as job loss on a scale greater than the lockdowns and economic contraction of the 2020–2022 Covid-19 crisis. If the crisis looked as though it might extend in time we could see limitations placed on the quantity of fuel people can buy. Perhaps we would see this done in the way it was implemented during the 1973 oil crisis when Organisation of Petroleum Exporting Countries retaliation against Western support for Israel in the war of that year saw fuel availability only on alternate days for vehicles with number plates ending in even and uneven numbers.
A cut-off or severe limitation on oil fuel imports would impact on more than transportation by road, rail and air. It would affect everything that uses oil in its production, such as agriculture which relies on diesel for farm machinery and the transportation of farm produce, as well as other manufactures. Flow-on effects would impact industries that rely on transportation, such as freight transport and tourism. Depending on the severity of the crisis the government would likely set aside fuel, especially diesel, for critical infrastructure like agriculture, food delivery, emergency services, medical, defence and other critical needs. Unnecessary travel would be discouraged.
Take away the liquid fuels, supply chains start to collapse, shortages occur and supermarkets start to ration purchases as they did when demand exceeded supply for some foods and other products as a result of supply chain disruptions—due to staff absenteeism—during the Covid pandemic. Then the effects of shortages start to cascade through society along with demand-driven price rises just as employee layoffs and loss of income attributable to fuel supply chain disruption starts to impact families.
What can we do?
Establishing a strategic reserve
The wisdom of establishing strategic reserves of critical supplies was emphasised with the shortage of personal protective equipment for medical workers during the Covid-19 pandemic. It is something worth doing for other essential supplies and, for oil, a start was made while oil prices were depressed a few years ago. Then, the federal government of the time invested $94 million to bolster the national stockpile of crude oil, however this only adds a limited volume to existing reserves.
The arrangement was that it is stored in the US because Australia lacks the required storage capacity. The government also announced $200 million in competitive grants to industry to build more diesel storage and to build an industry-based stockholding of petrol and aviation fuels to cover 28 days of consumption by 2024. The aim is to increase diesel stocks by 40 percent, an extra 780 megalitres.
A twenty-eight day fuel reserve would take us through a short-lived crisis that reduced our oil imports, however a China-Taiwan-US conflict in the region could last longer. Even were a ceasefire arranged after only a short time, prices would remain volatile until hostilities showed sign of a longer ceasefire. Australia does not have any oil tankers of its own, leaving open the possibility that tanker companies might cease supplying Australia because of the risk to their vessels tranisiting the near-conflict region. Meanwhile, the Australian government and oil companies would be searching for alternative sources of oil fuels in an environment of increased demand and prices. As this flowed on to the petrol pump the financial casualties would be people reliant on motor vehicles for their work, for transportation to and from their workplace and for the transportation of freight.
Are there alternative fuels?
Yes, there are. Some are already in use. Some are additives to diesel fuel.
Compressed natural gas may have some potential as an alternative transport fuel as well as for other uses and is already used by an estimated 3000 vehicles, according to Energy Network Australia. Western Australia dominates production, supplying 56 percent of national exports from the North West Shelf. Queensland produces 29 percent and the Northern Territory 15 percent.
Biodiesel would be an alternative fuel that would supplement the diesel fuel supply. It would be of little value in an oil supply crisis that appears suddenly. A portion of requirements could be produced from agricultural waste, however that supply would be limited and probably insufficient to meet national requirements even if it was expanded. Scaling-up biodiesel production is a policy option for government that would require increasing its production from agricultural waste and establishing plantations of source species on agricultural land. Because it is added to diesel, the vulnerability of diesel to import disruption remains. It is the same for ethanol.
What about electrification? The electrification of the private motor vehicle fleet is already underway, however electrifying the diesel truck fleet on which the movement of commercial freight depends is a bigger challenge. Electrification of the railway network would be possible as a partial replacement for diesel fuel, and this could relieve pressure on long-distance truck transportation although that would still be needed for regions not serviced by rail.
Crisis a stimulant for renewables
A cut-off or severe disruption to Australia’s oil fuel supply chain could stimulate the diversification of Australia’s energy mix and promote domestic alternatives to oil-based fuels. This could lead to increased investments and development in renewable energy sources, electric vehicles, biofuels, investigation of the viability of geothermal energy and energy efficiency solutions.
We have already made a start in this with the rapid implementation of solar and wind energy supplying the grid, and these sources could be expanded. Plans are already underway for this.
According to the federal government, in 2021 Australia’s onshore wind capacity was increased by 1.7GW to more than 9.1 GW. The new legal framework, the Offshore Electricity Infrastructure Act that was passed in June 2022 is expected to boost generation with the construction of wind farms in the near-offshore. In 2022 the federal government declared the Gippsland coast to be Australia’s first of a total of six offshore wind energy zones. The Clean Energy Council puts wind generated energy at 5.9 percent of the country’s clean energy production and 9.9 percent of Australia’s overall electricity. In 2020 the sector added more than 1 GW of new capacity for the first time, making it the second-straight record-breaking year for the sector.
What of domestic energy?
The adoption of photovoltaics and solar hot water is already well underway with the Clean Energy Regulator identifying a photovoltaic (PV)-installed rooftop capacity of 18,200MW (or 18.2GW) generating around 24,000 gigawatt hours from 3.3 million installed systems in 2022, the highest coverage of solar in the world. Roughly one in three suitable Australian households has solar PV panels, according to the regulator. The Regulator anticipates an additional 2700 megawatts of rooftop solar capacity will be installed this year. The average cost per watt for a solar panel in 2006 was around $8.50 per watt. By 2019 it had fallen to $0.52 per watt.
Advances in battery technology is flowing on as an uptake in home photovoltaic system energy storage. A total of 31,000 battery energy storage systems were installed in 2020, a 20 per cent jump on total numbers in 2019, according to ReNew Economy. SunWiz says 2020 saw the number of batteries installed, include those in homes, commercial premises and on the grid took the nation’s cumulative tally of installed battery energy storage systems to almost 110,000. SunWiz forecasted an additional 33,000 home battery installations for the coming year.
While domestic renewables offer the assurance of energy supply for households they do not solve problems coming from a large scale oil supply crisis because that has more to do with transportation. What they do is supplement the existing electricity supply from coal, wind, PV and hydro sources to offer a degree of home energy security.
In operation, renewables are largely independent of external market pressures such as rising fuel prices. Transitioning to them may take time until alternative energy sources are widely available, during which the nation could face challenges in meeting its energy demands.
The time for action is now
Without access or with a severe reduction in access to oil imports there would be a significant disruption in supply chains including reduced availability of fuel for cars, trucks, ships and aircraft. This would lead to transportation disruptions and limit mobility. It could potentially impact essential services such as emergency response, healthcare and food delivery.
As a result, the cost of transportation, manufacturing and various goods and services would increase, leading to inflationary pressures. This could have an adverse effect on the overall economy, potentially leading to job losses and reduced economic growth.
The consequence of a significant reduction (imports transiting regions outside potential conflict zones may still arrive, however they would meet only partial demand and a crisis would boost their cost) or a complete cessation of oil imports is for a rapid and partial, or perhaps a complete collapse of the national economy with all that follows regarding transportation, medical services, communications, food supply, municipal water systems and more.
Cutting or severely restricting oil fuel imports would expose Australia’s vulnerability to external supply shocks and geopolitical factors. Relying solely on domestic oil production could be challenging as Australia’s oil reserves are limited, and the country is not self-sufficient in meeting its energy needs. This potentially jeopardises Australia’s energy security, leaving it dependent on global oil prices and potential disruptions in supply chains.
The impact of a collapse of our oil fuel supply chain on our essential infrastructure could cripple the country. This makes now the time to start reducing our reliance on oil and other fossil fuels, to expand energy generation from renewable sources and to take active measures to make Australia’s energy system resilient to external conflict.
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