Strategic Petroleum Reserves, Energy Security and a Potential Crisis

19 September 2018 George Coakley, Research Assistant, Northern Australia and Landcare Research Programme

Background

After the fourth Arab-Israeli conflict in 1973 (also known as the Yom Kippur War), Arab countries, led by Saudi Arabia, used their energy deposits to create an oil crisis. This was partly to reduce Western support for Israel, but also to highlight the West’s dependence on their energy resources. They reduced oil production, which led to skyrocketing oil prices. In 1974, in the wake of these events, the International Energy Agency (IEA) was founded. The Yom Kippur conflict only lasted several weeks, but the ramifications proved to be very costly. This led to the IEA mandating a 90-day Strategic Petroleum Reserve (SPR) for all signatory members, in case similar events recurred. As of 2018, Australia’s SPR will struggle to last 3 weeks (or nineteen days).

Comment

Australia produces only two per cent of its oil and petroleum requirements, the rest coming from the Middle East and Asia Pacific regions. In the event of a crisis in either region, it would have a major effect on Australia’s oil imports and energy security. Australia has largely untapped resources in various oil basins; mainly in Queensland, off the Victorian coast and in Western Australia. Tapping the resources in these areas could address the issue of Australia’s low SPR.

Australia joined the IEA in 1979, when it was a net exporter of oil. Over the following decades, however, the industry in Australia declined, leaving only four refineries; in Perth, Melbourne, Brisbane and Sydney. One consequence of this decline is that, since 2012, Australia has been non-compliant with the IEA-mandated SPR and has lagged further behind each year.

Increasing energy imports from Singapore, Malaysia and Indonesia is another option for mitigating this issue, but it has several drawbacks. Singapore is one of Australia’s largest suppliers of refined petroleum (jet fuel, diesel, etc.), but 40 per cent of Singapore’s own oil is sourced from the Middle East, specifically from Gulf Cooperation Council (GCC) countries. These countries, unlike South Korea, another large source of Australia’s oil imports, are less likely to be directly stressed if conflict arose on the Korean Peninsula. On the other hand, if tensions with Iran advance further and the Strait of Hormuz is blocked, or a tanker war breaks out (as occurred during the first Persian Gulf conflict), Singapore’s oil imports, like Australia’s energy imports, would be greatly disrupted. Another factor is that Indonesia and Malaysia are producers of crude oil, so imports from those countries would need to be refined by Australia’s dwindling refinery sector.

While importing more refined and/or crude oil from allied countries to boost Australian stockpiles remains an option, the risk of conflict raises doubts about the certainty of that supply. Exploring Australia’s untapped domestic resources through new mechanisms, such as hydrologic fracturing (fracking) is another option. Large deposits of shale oil exist throughout the country. The recent rise of fracking in the United States helped increase its oil market, bolster its reserves and reduce its reliance on the Organisation of Petroleum Exporting Countries (OPEC). OPEC’s hold over US oil supplies has been an important factor, as was evidenced during the Yom Kippur conflict. Besides providing the US with greater energy independence, fracking also opens up the possibility of it becoming a larger oil exporter.

Continuous political instability in Canberra and the ensuing disagreements on energy policy, further imperil progress in this critical area. The Turnbull Government began addressing this issue earlier this year, but it is yet to be addressed by the Morrison Government. The debate on energy policy in Australia continues to predominantly revolve around renewables and coal-fired power stations, leaving other issues and resources untouched.

While there are several routes to address Australia’s low SPR, action is required to solve this crisis. Public awareness needs to be raised, to help convey the urgency of resolving this issue. With instability in the Korean Peninsula, the ongoing Qatari crisis and Iran’s proxy battle with the Emirati and Saudi kingdoms, things could worsen in any of these areas, affecting oil prices and endangering supply levels. This, of course, would reduce Australia’s chances of making it past its current nineteen-day reserves. The ramifications to the economy, security and day-to-day life could be dire.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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