Australia is throwing away a lot of money after poorly supporting local oil refineries
Vandana Hari is the founder of Singapore-based Vanda Insights, which tracks energy markets.
The Australian government’s recent move to shell out $ 1.8 billion to keep the country’s last two refineries in operation for another decade is a surprisingly regressive step for a free market economy. It could also send the wrong signal to the world of private enterprise, which thrives on creative destruction.
Australia is not alone in having to make such difficult decisions. Countries face growing challenges in developing sound and sustainable energy security strategies, driven by a powerful mix of environmental and economic imperatives. The resurgence of resource nationalism, growing trade tensions and a new bubble mentality spawned by COVID are creating the wrong incentives.
As part of a deal with the Australian government, private players Ampol and Viva Energy have agreed to keep their refineries open until at least 2027, with an option to receive taxpayer aid until 2030. The companies will use approximately $ 96.6 million each from the assistance program. to modernize their factories to produce cleaner and almost sulfur-free gasoline by the end of 2024. Part of the promised aid will only be paid if refining margins fall below a certain threshold.
According to Australian Prime Minister Scott Morrison, the aid program will save 1,250 jobs. This is probably a good political result, but Morrison’s claim that he will provide a “boost to Australia’s long-term fuel security by locking in the future” of its refining sector seems less plausible. .
The petroleum refining sector around the world has been hit by a drop in fuel demand induced by COVID and has experienced a relatively slower recovery compared to other sectors, characterized by excess capacity and depressed margins. Australia’s relatively old and small refineries – unable to compete with cheaper fuel imports available from newer, larger and more efficient factories across Asia – were already under enormous pressure before the pandemic .
Stagnant domestic demand for fuel has discouraged upgrades and expansions, with three refineries having closed in the past decade. Of the four refineries that remain operational, two – one owned by BP, the other owned by Exxon Mobil – will cease operations in the coming months, raising serious concerns in Canberra over what it describes as “Safety implications of liquid fuels in Australia. “
This concern is curious, given that the country can afford to import from the region any amount of high-quality fuel it pleases to supplement domestic demand. As some of the closed Australian refineries have been converted into storage facilities for imports, Australia has sufficient storage capacity.
This brings us to the key question of what “fuel safety” means for a country. Adopting the simplistic definition that a country must be able to produce and refine all or most of its domestic fuel needs is not only deeply flawed, but represents a dangerous waste of time, energy and energy. valuable resources. Trying to achieve fuel safety is chasing a pipe dream.
Geology dictates a country’s ownership of fossil fuel reserves and it cannot be changed. Any country can aim to develop sufficient refining capacity to meet all of its fuel needs. But unless it is also a large producer of crude, it will end up importing the raw material for refineries as well. Instead of alleviating dependence on external supplies, it only shifts the dependence from one type of product to another.
Maintaining a few months of domestic oil consumption as a strategic reserve to deal with external supply shocks, as many import-dependent countries do, is a good idea, but it is only an insurance policy. short term.
It may seem that the major oil and gas producing and exporting countries have it all because they have security of energy supply. But they too depend on markets and buyers to monetize their oil wealth. Whether they are looking to export raw or refined products, they always need consumers. These countries end up worrying about “demand security”.
In short, oil is a highly interdependent ecosystem across the world. It is also a polluting fuel and an industry in unprecedented transition, seeking a balance between environmental sustainability on the one hand and access and accessibility to energy on the other hand to support development. global economy across the world.
Oil may be a declining industry, but it has to come a long way before cleaner economic alternatives can claim the lion’s share of the world’s energy supply. We must not only use fossil fuel resources wisely throughout this unexplored journey, but ensure that it is done in the most cost effective manner. This means not only technological progress, but also the recourse to the efficiency created by free markets which avoid subsidies, which reward innovation and competition and constantly eliminate inefficient components of the system.
A strong and forward-looking national energy strategy, whatever the region of the world and the type of economy, must embrace these fundamental principles.
Once Australian taxpayers stop subsidizing their operations, the country’s two remaining Australian refineries could still decide to fold up their tents after all. If this happens, Australia will remain wholly or primarily dependent on imports for its fuel needs, and that is no reason for the government to fall asleep.
But the $ 1.8 billion the Morrison government is spending now could have been better spent on energy conservation, efficiency and transition projects, which also create long-term employment opportunities.