'Broader' security

By Nic Moulis, General Manager, ACAPMA

Kevin07 landed on the Australian political runway three years ago and went straight to work on 'border' security. Some Australians may be concerned about the more than 100 boats carrying asylum-seekers that have reached our shores since. However, in the same period, Australia's imports of crude oil and petroleum products increased significantly. So, is it the bigger ships that should concern Australians?

The supply line that eventually delivers petrol to cars – exploration, production, shipping, refining, storing, distributing – is pretty simple, but not as straightforward as you would expect. In 2008–09, Australia 'mined' 27 800 ML (million litres) of crude oil, more than 60% in the Carnarvon Basin in Western Australia. Over the same period, Australia refined 29 390 ML of petrol and diesel, mainly in the eastern states, for supply to consumers.

Economics & international oil distribution

However, more than 70% of the crude oil produced here is sent to refineries in other countries, and Australia imported about 31 000 ML of crude oil, mainly from Vietnam and Indonesia. Seems silly, but this is driven by the economics of international oil distribution.

Not only is it cheaper to transport crude oil from Western Australian to Asia than deliver it to the east coast, but also Australian crude oil tends to be a lighter 'sweeter' product that attracts higher prices in global markets.

Australian refiners seek out cheaper alternatives from other sources for local refining. In addition, the yield profile from Australia's sweet crude during the refining process does not closely match Australia's demand. If we used our own crude oil it could reduce refinery output by around 30%!

In recent years, more and more refined petroleum has been imported into the Australian market. Due to refinery closures and negligible investment in capacity in recent years, Australian refineries cannot keep up with demand here, and refined petrol and diesel are now regularly imported from Asian countries such as Singapore and the Republic of Korea. There has been an upside to this, with independent wholesale operators now shipping an increasing amount of this imported petroleum.

According to the Sydney University Centre for International Security Studies, "… the economic wellbeing of a state and its people depends upon energy resources". If this is the case, Australians should feel good. We may have an outward glow of health from the export dollars earned by our abundant coal and natural gas, but when it comes to the liquid fuels that move people and goods across the country we are much less well endowed.

As we become increasingly dependent on imported oil and petroleum products, our wellbeing potentially diminishes.

The options … what are they?

The Australia Government may seem to have two easy options: either improve supply or restrict demand. The reality is that policy in this area is challenging. The Government may feel compelled to introduce policies that reduce our access to fuel. We have seen this in extreme circumstances in the past: some readers would remember the odds and evens rationing during the 1970s.

However, to use this on a daily basis would be tantamount to creating a controlled state, restricting public freedom and commercial enterprise. Increased taxation could be an instrument to reduce demand: the level of fuel excise was frozen at 38.143cpl by the previous government. Of course, higher excise means higher prices … it would be political suicide for any government considering that course.

Another option is to require crude oil produced locally to be fully used at local refineries, but this does not make technical or economic sense. Implementation would require a reduction in fuel quality standards to allow for better yields from Australian crude oils. However, this reintroduces problems, such as the sulphur content in diesel - an issue that fuel standards were introduced to address.

I would argue that due to the tight margins in the industry, refiners have become very efficient in their operation based on selecting the best crude oil for the product mix. Any government intervention on the supply side of the refining process will create inefficiencies and increase costs.

These cost increases would be passed through to consumers in the prices that motorists pay for fuel. Further, restricting imports of refined petroleum products would affect the supply of independent wholesale fuel, something that the ACCC has identified as critical for consumer welfare.

We could improve our fuel security by increasing our strategic stocks of crude oil and refined petroleum. Under current circumstances, there is about 30 days' worth of consumption in the supply line – 10 days of crude oil in storage and refining, and 20 days of refined product in marketing.

There has been recent discussion about changes to strategic stocks and using legislation to increase the number of days covered. At the current barrel cost of US$85, to hold an additional one month of Australia's crude oil requirement would cost more than US$1.7 billion. This figure does not include the infrastructure investment required to create additional storage capacity.

Australia is not alone in this dilemma. Few countries are fully self-sufficient in petroleum. Fuel security for an increasingly mobile world requires 'broader' security. Politicians and the public need to appreciate that it will be international cooperation and political stability that will deliver fuel security for all.

Any country that tries to go it alone with a nationalistic approach is doomed to fail, deluded by a false sense of security.

Nic Moulis is the General Manager of the Australasian Convenience and Petroleum Marketers Association (ACAPMA). ACAPMA is an employer association representing the interest of distributors and retailers in the Petrol and Convenience industry.