What would a fuel drought do to Australia?

WAFarmers CEO Trevor Whittington explores the potential of an Australian fuel drought

Those with long memories will recall the 1973 oil crisis, which saw prices rise rapidly from US$3 to nearly $12 a barrel, and with it, long queues at petrol stations.

The one long-term benefit of the surge in prices was that it underpinned a huge boost in Australian petroleum exploration and underwrote the ramp-up of production. Australia’s peak production was reached in 2000, when the country was 90   per cent self-sufficient in oil, minus the imports and exports of specialist lines.

Since then, it’s been a steady downward run, with local production collapsing to 10 per cent of consumption in June 2020 and with it has come the loss of five of Australia’s eight refineries, including the recent announcement of the looming closure of BP’s Kwinana facility, the largest in Australia.

In response to the growing concerns around the lack of domestic refining capacity, the federal government recently announced a production support payment of a minimum one cent per litre for primary transport fuels (petrol, diesel, and jet fuel) for refineries that continue operations in Australia.

At the beginning of last year, it was revealed that Australia had under 50 days’ worth of fuel stocks on hand. Worse, we had just 17 days’ worth of diesel, 20 days of aviation fuel and 23 days of unleaded petrol in reserve. Just five years ago, we had double that amount.

In the federal government’s recent liquid fuel security report, the government committed to rebuilding our fuel stockpile by 2026.

Why it will take five years is not explained and in no part of the plan was there any consideration of the need to ensure farmers carry enough stocks to complete their full seeding or harvest programs.

The plan is to stockpile our own reserve of crude oil, via an arrangement to purchase $94m of oil from the Strategic Petroleum Reserve in the United States.

Even if shipped from the United States, we are looking at around 35 days before the crude is pumped into the Australian refineries, and then it would need to be refined and shipped across to WA.

Of course, this is during peacetime – if Australia were to call for access during conflict, the US would have sovereign priority over the resources. It might not come at all.

The other alternative is storing the crude in Australia in deep underground caverns as we have similar geology and could establish our own onshore underground salt cavern storage facilities, most likely near Longreach Queensland.

The only problem is that they would be far from the refineries. So, failing storing our own crude, the government could elect to build big tanker depots for fuel, but unlike unprocessed crude, refined petroleum is unstable and has a limited life span of 6–12 months before it degrades.

There are no simple options, but the government needs to at least lift the refined reserve up to the 90-day level and that means more tanks scattered strategically across Australia that are being topped up weekly.

Diesel is vital not only for farmers but also for emergency services and is the back-up power source for electricity generation in critical services like hospitals, water and sanitation, and electricity generation for farms and remote communities.

In December, the government announced $200 million in funding to build new diesel storage in Australia through a competitive grants program as part of its policy to increase   the minimum level of diesel stocks by 40 per cent by 2024. But cleverly they have selected a date that is just outside of the next electoral cycle, no doubt to ensure they can’t be held to account.

Unfortunately, the brains trust in Canberra has missed including one of Australia’s largest diesel storage managers and that is farmers and their on-farm supplies.

One of the obvious, but overlooked, ways of increasing Australia’s diesel fuel reserves is to incentive farmers to pre- purchase and store on-farm their seasonal fuel requirements up to 90 days out from when they require it.

To do this, all that would be required is for government to maintain the current instant asset write off provisions in the tax rules on the purchase of fuel tanks and the provision of additional tax incentives for farmers to pre-purchase their full season’s diesel requirements by the end of the first and third quarters each year.

As for the governments, they should be paying local depots to hold strategic reserves on their behalf to ensure that government fleet, regional diesel power generators and emergency services have 90 days in reserve.

And a final point to farmers as they plan for seeding. You should not wait for the government to act. Rather, you need to include within your strategic risk plans your own means of securing seasonal fuel, either by early purchasing or doing a deal with your local supplier for priority access to their reserves as a fuel drought could be an even bigger risk to your business than a rain drought.