Unprecedented falls of crude oil prices, including briefly into negative territory, are a moment of opportunity that Australia can use to improve its liquid fuel security, Ian Cronshaw writes.
Over the course of the last decade, the United States has rapidly moved from being the world’s largest oil importer to a net oil exporter, as shale oil production has ramped up. However, it has not been able to expand pipeline and storage facilities at that same pace, and the price of the major American traded crude oil, West Texas Intermediate (WTI), has increasingly become disconnected from the price of other crudes traded globally, such as North Sea Brent and Malaysian Tapis.
The rapid collapse in global oil demand in recent months on the heels of the COVID-19 outbreak has seen around 30 per cent of global oil demand wiped out virtually overnight. While much has been made of the historic deal by the OPEC+ group to limit oil production in May, the reality is that such an obvious and dramatic imbalance between supply and demand cannot be easily managed.
With the pandemic and its associated closures spreading, global crude oil prices have plummeted by around two-thirds from the start of 2020. In the case of Asian crudes, from $65 a barrel to $22. The logistic systems of even the sophisticated global oil industry have been completely overwhelmed by the sudden buildup of stocks, particularly in the United States. Most key storage facilities are full, with crude oil producing very low and, recently, negative, prices, as the imbalance manifests itself in buyers being paid to settle futures.
While the immediate impact of negative crude oil prices will not be seen in Australia, the fall in crude oil prices based on Asian regional markers – Malaysian Tapis crude oil, for instance, has fallen from $70 to $22 a barrel – has seen pump prices for petrol and diesel fall rapidly in more competitive Australian retail markets. The crude oil component of petrol is now at around 20 cents per litre, with taxes accounting for 50 to 55 cents, and refining, transport and marketing the balance.
The Australian Government has announced that it will take advantage of this fall in global crude oil prices to commence oil stockpiling, with a view to meeting its International Energy Agency (IEA) treaty obligations to hold 90 days’ supply of net oil imports.
Australia, alone amongst major OECD countries, has no government owned or mandated oil stockpiles. Australia has been in breach of its formal treaty obligations on this for most of this decade, and since 2013, as determined by the IEA methodology, stockpiles of crude oil and oil products have been around 55 days’ supply of oil.
This actually overstates Australia’s position, as the methodology accounts for exports of light oil associated with offshore gas production. Recent data indicates that stocks of key products, petrol, diesel, and jet fuel, are measured in terms of a few weeks. Moreover, Australia imports around half of its liquid fuel requirements as already refined product from refining centres in Singapore, Korea, Japan, and China.
In turn, these centres are heavily or totally reliant on crude oil imports, generally from the Middle East. The balance of Australia’s fuel needs is met from four domestic refineries, which are in turn almost entirely dependent on crude oil imports, from sources such as the United Arab Emirates, Yemen, Malaysia, Libya, and Algeria.
In response to the crash in prices, the government has announced that some $94 million will be spent to acquire crude oil reserves, to be placed in the United States Strategic Petroleum Reserve. At the current price of WTI of $20 a barrel, the postulated amount would buy enough oil to run Australia for around 70 hours, not taking into account storage costs. This might not seem like much, but if oil becomes even cheaper, the volumes, and coverage, will be correspondingly greater. While not revolutionary, it’s a start.
It is also worth observing that the oil will be stored in facilities around the Gulf of Mexico, a region severely damaged in 2005 when struck by three hurricanes, dramatically reducing crude oil and gas output, and destroying power and pipeline systems.
The loss of oil output led to a very rapid mobilisation of IEA oil stocks, which limited what might well have been a dramatic spike in global oil prices. Australia played no part in the 2005 IEA response
The region remains increasingly hurricane prone, and hence represents a risk for the government to take on. In the event of a future oil supply disruption, either regionally or globally, unlikely though that may seem at the moment, these oil stocks would need to be mobilised, shipped to Australia – taking weeks – then refined here, assuming the country’s four relatively small refineries are still operating.
Australia’s stocks of refined product, which stand at, in petrol for example, three weeks of normal use, could be expected to rapidly disappear in an emergency, as panic buying would ensue.
Clearly, stocks of refined oil product held close to major demand centres are a much more effective security alternative, both in terms of rapid delivery to users, and in calming panic buying, an alternative approach followed by many IEA countries.
But the government’s approach to fuel security needs to be much broader, considering the need for improving efficiency in the country’s vehicle fleet, which has seen a deterioration in recent years, as large and inefficient cars have come to dominate vehicle sales.
While recent falls in fuel prices, to the extent they are sustained, can allow Australia to purchase this oil, it will not encourage efficient vehicles, nor the uptake of electric vehicles, essential for both security and improving environmental performance.
The government’s choice to stockpile crude oil may be a step in the right direction, but it is these permanent policy steps that will be the road to real fuel security for Australia, and they must not be forgotten when policymakers craft a response to this oil price crash.