Energy Minister’s good oil on our energy reserves

Illustration: Eric Lobbecke

Could it be that coronavirus really is beginning to wake Australia up to its strategic vulnerabilities? Energy Minister Angus Taylor made a smart move to announce­ the government would spend $94m to purchase oil, while it is dirt cheap, as the beginning­ of a strategic oil reserve for Australia. Even more important, Taylor committed to building storage cap­acity for the reserve in Australia.

Previously, this has been regarded as too expensive and the relevant bits of the industry, plus much of the bureaucracy, put their absolute faith in Australia always being able to access whatever oil it needs from international markets.

But as the virus demonstrates in the most graphic way, many, many things can disrupt markets fundamentally. The International Energy Agency requires member nations to have 90 days of fuel reserves at any time. As an island nation, ­Australia is vulnerable to supply shocks and disruptions. The government claims there is roughly 30 days of fuel stored here. But to get this figure, it counts fuel which is not regarded as “in storage” in other nations. In many types of fuel we have little more than three weeks’ storage.

Of course, there is a glut of fuel right now with the global economy all but shut down, and with the fallout of supply wars between Russia and Saudi Arabia.

But one key to preparing for a crisis is to use the times when the crisis is furthest away to build your capabilities. Of course the best solution is to explore for and extract much more oil in Australia, and produce, refine and use it locally.

If the price of oil when Australia actually buys it is something like $15 a barrel, we will get something like six million barrels for our money. That’s a lot of oil.

In the short term, we will keep the oil in the US, because there is nowhere to store it here. Our four refineries have no excess storage capacity.

But the critical element in Taylor­’s statement, and in the Morrison government’s commitment on this issue, is that the oil will be brought back here for storage­ in due course.

This means inevitably that Australia will build fuel farms. That is the inescapable and wholly welcome­ consequence of the government’s statements on Wednesday. It may be that some of the sites of our many closed and now disused old refineries will be ripe for conversion.

It makes most sense to store crude oil, as it lasts forever, whereas storing refined oil is more problematic because you need to move it along within six months or so or it goes off.

Taylor also said he wanted Australia to look towards opportunities in manufacturing and a bigger manufacturing industry, especially in strategic products. The government has moved on this in medical supplies and is doing so in fuel.

It is to be hoped that this indicates a whole new paradigm for Australian development. It is a great strength of Scott Morrison and Josh Frydenberg that they have not been ideological, theoretical, or hung up on dogma in respondi­ng to this crisis.

There is a spectrum of opinion within the Liberal Party which is not left or right. Politicians such as Andrew Hastie and many others are all about building national capac­ity and national resilience. Others such as Tim Wilson, as with Hastie a fine contributor to national Australian politics, are more attache­d to free-market dogmas.

So Wilson in his public comments has emphasised diversifying supply chains internationally rather­ than building capacity in Australia. Hastie is absolutely delighted­ at the announcement that we are going to have a strat­egic oil reserve on Australian shores and that we plan to encourage greater manufacturing.

As this column has often argued­, Australia is acutely vulnerable to many different types of disruption. We have done brilliantly in responding to coronavirus. But the possibility of strategic disruption through, for example, military tension or cyber attack or renewed pandemics or many other scenar­ios we cannot now foresee, is real and growing.

If we build our own domestic production capacity, we broaden our economic prospects and create real national resilience.

Taylor believes that with energy­ prices at anything less than $70 per megawatt hour for electricity and $7 per gigajoule for gas, Australian manufacturing has every chance of being thoroughly competitive. Our energy prices had reached those thresholds before­ COVID-19 and are now well below them.

We need manufacturing capabil­ity in critical strategic industrie­s, just as we have decided to have a national naval ship building industry.

But given how much of our economic wealth derives from minerals and agriculture, we should have big metal processing and food manufacturing industries. We are the biggest gas exporte­r in the world but where is our petrochemicals industry?

Globalisation was in many ways good for Australia but it narrowed our economy. No one is a stronger supporter of immigration in principle­ than I am, though natur­ally­ it will suffer a big temporary halt during the virus experience.

But our population growth in recent years has not coincided with a flowering of diversity in the Aust­ralian economy. Instead, our economy has become more narrow. Minerals and agriculture for exports and services for the rest of us, with only two significant services exports, education and tourism.

Globalisation went too far in Australia. We lost our industrial base and critical elements of our economy. Three things killed our manufacturing. One was an insanely­ high exchange rate. That was the case when we tragically and needlessly lost our car manufacturing industry.

The second was high energy prices, an unbelievable own goal in a country as richly endowed with energy resources as we are.

A smaller but still formidable factor was union bloody-mindedness. But surely now unions want jobs. And in advanced Western societi­es manufacturing is capital intensive and its jobs are well paid.

We need to have the establishment and support of a manufacturing industry as an object of national policy. The government’s statements around the fuel reserve, and more generally, suggest that is the case.

Part of this is obviously strat­egic. We have become dangerously dependent on China in many different­ aspects of economic life, though of course the principles of national resilience extend far beyond China. However, we have to internalise fully the fact that China is not a market economy and does not behave like one internationally.

And it is so big it distorts the international market in fundamental ways, such as by making Huawei the cheapest provider of 5G gear, or almost monopolising the supply of antibiotics. It is not anti-China for Australia to want to control its own destiny. A strategic oil reserve, stored in Australia, is a very good first step.