Download the full report: All at Sea: Fuel, War and Australia’s Achilles Heel
Australia is critically exposed to geopolitical risk due to our overwhelming dependence on imported liquid fuels.
The recent Iran war and disruption through the Strait of Hormuz have already shown how quickly overseas conflicts can translate into price spikes, physical shortages and emergency planning in Australia, even before any direct conflict emerges in our own region.
A major war in Asia could cut off far more of our supply almost overnight, and this is no longer a contingency Australia can afford to ignore. Current policy positions have failed to confront the seriousness of this exposure, and have left us without a sufficient response.
Happily, Australia is blessed with energy abundance on the shores of our own continent, and this abundance can be harnessed to dramatically improve our security through domestic production of liquid fuels. The necessary steps to achieve this may have very little economic cost. Clear political signals that overturn recent demonisation of fossil fuels could potentially unlock private investment that could transform our domestic production. And even if some costs are unavoidable and ongoing, there’s a strong case to suggest that those costs would yield far greater benefits to our national security than comparable expenditures we already make in defence.
Part I outlines the current liquid fuel insecurity in Australia, grounded in the growing threat of a major war in our region.
Liquid fuels are essential to the functioning of our nation and economy, and are likely to remain so for several decades, making liquid fuel security a national security priority. Australia’s liquid fuel supply is critically insecure. With very little domestic crude extraction or refining, we import 90% of our liquid fuels, primarily from Asia.
Our region is becoming increasingly dangerous and the risk of a major war in the pacific is becoming non-trivial, evidenced by China’s military build-up to contest US primacy, geographical expansion in the South China sea, and increasingly aggressive posture towards neighbours. A war in Asia would put almost all of our fuel supply in jeopardy, particularly due to our reliance on major Asian refineries.
Existing policies are discussed from first principles, and efficacy and cost are compared across strategies of reserves, diversification, demand reduction, and domestic production.
- Reserves are only useful for short-term shocks. Our 30-day stocks do not provide significant security in the event of war;
- Diversification offers the semblance of security but, in reality, it does not guarantee supply;
- Demand reduction through electrification is not a viable strategy. Passenger vehicles are only 30% of demand. Freight, aviation, agriculture and mining will continue to need liquid fuel in the medium term;
- Increased domestic production – both in terms of refinery capacity and local feedstocks for them – is the only strategy that will achieve real risk mitigation under an Asian war scenario.
We conclude that Australia is unprepared for a major war with regard to fuel supply, that we remain extremely vulnerable to anything except short-term shocks in the supply chain, and that much more serious action is required.
Part II shows that Australia has realistic and cost-effective options for fuel security. We recommend a strategy of domestic production as the only way to achieve genuine security, and highlight that there are very promising opportunities that may have little net cost to achieve high levels of domestic production.
- Large-scale crude reserves are discussed as possible but potentially costly, and still only useful as a bridging mechanism to restored supply;
- Domestic production is recommended, particularly the opportunity to deregulate and incentivise exploration for unconventional oil resources;
- Alternative synthesis of fuel from domestic feedstocks is also recommended, with coal, gas, oil shale and biomass being candidates. Of these, coal presents the greatest opportunity due to cheap and plentiful feedstock offering scale and cost benefits. The spread of heavier molecules produced by such conversions promises to meet our high demand for diesel and aviation fuels in a way that our existing condensate-heavy production cannot. They also have the ability to produce a range of valuable and critical chemicals to support the economic case. We recommend that private initiatives for pilot plants, and subsequent large-scale developments be approved, or incentivised if necessary.
Part III discusses the rationale for paying an insurance premium to secure our fuel supply. Besides the direct national security benefit, there are other benefits of a strategy of domestic production which have significant value;
- Reducing imports of fuel – our most critical import – would radically reduce the critical volume of shipping our nation depends upon in a crisis. Recasting our defence strategy in light of this presents significant opportunities. Whilst it is popular in defence circles to repeat the refrain that we are an island, and hence must be a maritime power, it is simultaneously true that we are also a continent. Our abundance of almost every critical physical resource within our own domain can allow us to engage in maritime commons out of a sense of opportunity, rather than existential obligation. Reducing the need to escort large numbers of slow-moving ships through contested straits and narrows could save crucial resources for more effective military capability developments.
- A strategy of domestic production would also significantly enhance the value Australia could offer to the US alliance and AUKUS. A plentiful supply of fuel across northern bases would make allied operations in our region much easier, at a cost that might be far less than expenditure we are already committed to under AUKUS for naval bases for this purpose.
The costs of realistic solutions are not extreme and are within the range of what could be absorbed by consumers at the fuel bowser, or what governments currently spend on closely related defence objectives. In many cases, all that is required are regulatory green lights. We conclude with recommendations to:
- Prioritise, incentivise, and deregulate domestic exploration and drilling for crude oil, gas, and unconventional petroleum in Australia, in order to restore domestic production as the central objective of fuel security policy;
- Approve and, if necessary, back coal-to-liquids pilot plants, so that Australia can test and scale one of the few domestic pathways capable of supplying a substantial share of national fuel and chemical demand;
- Expand in-country fuel reserves as a bridge, not a substitute, with priority given to distributed storage close to major end-users such as farmers, miners, freight operators, and remote industry;
- Recapitalise and expand domestic refining capacity to meet Australia’s diesel-heavy fuel needs, including hydrocracking capability able to process a wider range of imported and synthetic feedstocks;
- Support complementary fuel streams where they make strategic sense, including Gas-to-Liquid, biofuels and other alternative liquid fuel pathways, while recognising that feedstock constraints are likely to limit them to a supplementary role;
- Establish a dedicated fuel security budget, funded from a portion of fuel excise, a new dedicated excise, or the defence budget, to support stockholding, enabling infrastructure, pilot projects, and other strategic interventions.
