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End to excise discount highlights Australia’s fuel-storage vulnerabilities

Posted By and on September 23, 2022 @ 06:00

One of the significant challenges with commodity investments is knowing when to buy and sell. Some view such investments as a form of institutionalised gambling. However, an understanding of the market, and a firm plan for return on investment, usually underpin investor decisions. Two years ago, the Australian government made such a commodity investment when it purchased $94 million worth of oil and stored it in the US Strategic Petroleum Reserve.

When Australia joined the International Energy Agency back in 1979 [1], it was still a net exporter of oil with enough leverage to control the volatility of the price of fuel in Australia. At the time of joining, Australia was exempt from IEA’s requirement to stockpile at least 90 days of daily net imports. A decline in refining capacity and increased imports over the years have meant that Australia became non-compliant with IEA’s stockpiling requirement in 2012 and has remained so ever since.

In February 2020, Australia held 25, 20 and 22 days of consumption cover for petrol, diesel and jet fuel, respectively. In April 2020, five months into the Covid-19 pandemic, the government officially recognised what countless economists and strategists had warned for over a decade: Australia’s just-in-time approach to fuel supplies and the gradual decline in onshore refining left the nation vulnerable. In response, the government announced the establishment of a national oil reserve. Australia bought roughly 30 million barrels, or three days of national supply at the current usage rate, at the historically low price of US$20 per barrel. It was a sound economic decision, given the dramatic fall in global oil prices. But it also exposed Australia’s lack of bulk storage capacity.

The government signed a 10-year lease agreement to store the oil in the US, arguing there was no more secure place than the US Strategic Petroleum Reserve. There’s no doubt that this is true from a US context. However, the other and more pressing reasons for this arrangement were the rising geostrategic tensions in Australia’s region and a bulk storage problem at home.

But storing oil thousands of kilometres away from Australian shores didn’t make strategic sense then or now. A more secure place would have been on Australian soil had it not been for the lack of commercial storage facilities. In this context, the government’s purchase seems more akin to a wise commodity investment than a means to increase fuel resilience.

A few weeks later, the government announced a three-part fuel security package. The first part of the package was a recommitment to establishing a government-owned oil reserve for domestic fuel security in the US. The second was a commitment to work with the private sector to develop options to increase local storage as quickly as possible. The third involves the government considering a temporary change to fuel standards. Just over two years later, despite the best efforts of the private and public sectors, there’s been no real improvement in fuel resilience.

The expiration [2] next week of the government’s fuel excise discount has brought the issues of fuel prices and energy security again front of mind. The excise cut was always going to be a short-term [3] solution.

The hope was that during the six months when it ran, the oil price would decline from its stratospheric heights. Unfortunately, the effects, albeit well intended, didn’t last long, and the scheme’s benefits have been eaten away by more oil price rises.

The challenges the scheme was trying to tackle are baked in with no easy solution. As of June 2022, Australia had a net import coverage [4] of 58 days and remains non-compliant with the IEA requirement even if we were to count the oil that’s on vessels on their way to Australia. The issue is about more than fuel prices; it is directly associated with Australia’s sovereign fuel production and storage capacity and the effects of those factors on long-term energy security. The government must address an enduring problem at the core of Australia’s access to liquid energy, which fulfils [5] more than half of Australia’s energy demand.

There can be no doubt that in the future, perhaps within a decade or two, Australia’s reliance on fossil fuels will be reduced. But as the country transitions to renewables, liquid energy will still play a role for some years. Australia should therefore increase its liquid-fuel storage capacity in these strategically uncertain times. Of course, such investments are challenging in an environment of economic uncertainty and increasing national debt.

The good news is that the 30 million barrels of oil the government bought in 2020 are worth a lot more today. The economic opportunity cost of the oil Australia has in the US Strategic Petroleum Reserve in the current market, trading at around US$85 per barrel, is easily quantifiable. Harder to measure is the strategic opportunity cost of not having that oil on Australian soil if it takes up to a month for it to arrive here on ships.

It seems that Australia’s commodity investment, which brings little in the way of fuel resilience, has matured. If we sell that oil on the open market and make a profit, what do we do with the money? Of course, there’s the argument that the government should put it towards repairing the budget, which is the reason for halting the fuel excise discount. The other idea is perhaps selling this oil and resolving the real problem by investing in onshore strategic storage.



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URL to article: https://www.aspistrategist.org.au/end-to-excise-discount-highlights-australias-fuel-storage-vulnerabilities/

URLs in this post:

[1] 1979: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1920/Quick_Guides/LiquidFuelSecurity

[2] expiration: https://www.abc.net.au/news/2022-07-07/fuel-prices-could-rise-again-in-september/101215854

[3] short-term: https://theconversation.com/what-will-the-fuel-excise-cut-save-you-not-as-much-as-the-treasurer-says-180330

[4] coverage: https://www.energy.gov.au/publications/australian-petroleum-statistics-2022

[5] fulfils: https://www.energy.gov.au/government-priorities/energy-security/australias-fuel-security#toc-anchor-securing-a-national-fuel-reserve

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