It was only last September that I wrote an article about Australia’s urgent need for a realistic fuel security policy. Back then, Australia had just four functioning oil refineries turning crude oil into petrol, diesel, aviation fuel and other products. Those four refineries were all old, small and uneconomic, and all of them faced closure.
Well things have changed, and not for the better. Because in those few short months we’ve seen BP announce the closure of its Kwinana refinery in Western Australia and Exxon Mobil its Altona Refinery in Melbourne.
So now we’re down to just two: Viva Energy’s Geelong plant and Caltex’s Lytton refinery in Brisbane. Sadly, the closures are unlikely to end there, because as well as being old, small and inefficient, Australia’s two remaining refineries are both under a lot of pressure from the falling demand for fuel. As I wrote back in September, the collapse in demand for aviation fuel because of the grounding of aircraft due to the pandemic has been a particular problem.
Little old refineries
The crux of the problem is that our little old refineries just can’t compete with the huge modern plants in Asia. Size really matters in refining because the fixed cost of producing fuel gets spread over more litres of fuel.
Viva Energy’s plant is losing money at an unsustainable rate and could be considered to be on life support. Since the Australian Government announced its $2.3 billion 10-year support program for Australia’s refineries in the last budget, half of Australia’s refineries have closed. Clearly that policy isn’t working too well.
So why is the closure of our refineries a problem? Surely we can keep doing what we’re increasingly doing now – simply import refined product from overseas? Well yes, we can until some unforeseen event occurs and then suddenly, we can’t. The sad fact is that we live in an increasingly unstable world where unpredictable events happen - whether they’re wars, political upheavals or natural disasters. Who could have foreseen that an outbreak of a disease in a Chinese food market would eventually affect millions, shut down international air travel and devastate businesses and the global economy?
Dire straits
If the COVID pandemic has taught us anything it’s that an attitude of “don’t worry, she’ll be right, it’ll probably never happen anyway” is just not good enough anymore. Australia’s fuel security is now in dire straits and we are worryingly vulnerable to unforeseen events that could disrupt the supply of fuel and bring our entire transport network to a halt.
It wouldn’t be quite as disturbing if the Australian government were following the lead of other countries and encouraging an orderly transition to electric vehicles, but it’s not. Electricity isn’t in short supply and isn’t dependant on international supply chains. Fuel security becomes less and less of a problem when more and more of Australia’s vehicles use domestically produced electricity, rather than imported petrol or diesel.
No easy solution
Now I’m not pretending for a moment that there’s an easy solution to all of this. There clearly isn’t. Encouraging the development of a big, new, modern refinery in Australia that can compete with the giant refineries overseas doesn’t make much sense in the face of falling demand for fuel and the inevitable rise of electric vehicles. The risk of developing a stranded asset is just too great. Around the world refineries are closing, not opening, and there’s a growing belief among oil producers that demand won’t return to pre-pandemic levels.
And it’s hard to see how Australia’s remaining old and inefficient refineries can be sensibly supported to keep producing the refined products we need for at least a decade or two until the inevitable transition to electric vehicles.
Like I said, it’s a very difficult problem, but it’s vital that we find a solution because right now our fuel security is looking vulnerable in an increasingly uncertain world. And that’s a worry for all of us.