Australia can’t outbid a blockade

Australia's fuel security conversation is usually based around how much fuel we have in reserve and how quickly we can secure additional cargoes in a supply crunch. That's important but it neglects the critical role of domestic supply in a true crisis.

For decades Australia prioritised lower prices and access to global markets over domestic industrial capacity. Newer mega-refineries in Asia produced fuel, landed, at much lower cost than our smaller and ageing refineries, which were systematically closed down. During the post-Cold War peace dividend, that made sense.

It means that our current strategy, as demonstrated during the Iran War, is to outbid the rest of the world when supply is constrained. The Federal government won't disclose the price per litre it paid for liquid fuels during this period, which only highlights two things: lowest cost fuel can suddenly become much more expensive; and in a conflict where imports are blocked, Australia has very little production to replace them with.

Australia does have two remaining refineries, but they meet a fraction of our needs and are coastal assets making them relatively vulnerable in a war.

In short, Australia's wealth can solve a shortages due to rising prices, but not shortages due to the closure of sea lanes or disruption of imports.

Australia is spending $350bn on AUKUS due to the deteriorating security situation in our region and for the same reason Australia should progressively rethink the scale and purpose of government fuel security spending. An important mission of the AUKUS submarines is to keep sea lanes open, including for liquid fuel imports. Domestic resilience could negate some of that requirement, at a fraction of the cost.

The Commonwealth has already committed billions to strategic fuel reserves and has demonstrated that it is prepared to use taxpayer dollars to secure overseas supply when necessary. This is sensible policy - a reserve provides immediate protection when supply is suddenly interrupted.

But stockpiles run down, whereas domestic production does not.

Australia has no shortage of emerging companies and technologies capable of producing liquid fuels. Many are conventional oil, gas and renewables plays, but many of these technologies are newer technologies like waste to energy, coal to liquid fuels, or nascent renewables projects which are technologically feasible but struggle to gain funding to transition from demonstration scale to commercially financeable production.

Whether conventional or emerging technology, the bottleneck for investment is often being able to demonstrate long term demand.

Investors will not readily finance hundreds of millions of dollars of infrastructure when the project's future customer base is uncertain and its product is being compared with imported fuel produced by mature assets operating at enormous scale.

Government can solve this without trying to pick technological winners.

Instead of relying principally on grant programs, Australia should progressively redirect government expenditure on overseas fuel toward large, long-duration contracts for Australian-produced strategic fuels.

The Commonwealth could specify the outcome: a defined volume of specification-compliant fuel, produced in Australia through a sufficiently resilient supply chain, under contracts lasting perhaps ten to fifteen years.

Then let the market compete. The Australian Defence Force has already certified most Army, Navy and Air Force assets to use Sustainable Aviation Fuel or Renewable Diesel. If they were to commit to domestic purchases, starting at what the industry is capable of delivering now and ramping at an aggressive but achievable pace, with price caps to protect budgets, this would be an excellent first step and improve resilience in the most critical sector – Defence.

Government should not need to decide what technology is the eventual winner. Producers compete on cost, reliability and their ability to answer the needs of the market.

The government provided contract itself becomes the support mechanism.

A company seeking finance for a demonstration plant is speculative. A company holding a long-term Commonwealth-backed offtake contract for tens of millions of litres per year is a very different investment proposition.

Over time, domestic production should replace an increasing share of fuel that government would otherwise purchase or secure internationally.

And the comparison should not be made solely on price per litre, since domestic technology development and fuel production has positive externalities.

Billions spent securing imported fuel is largely an expenditure on fuel and insurance. The same spent supporting Australian production can also create factories, skilled jobs, intellectual property, engineering capability, local supply chains, private investment and potentially export industries. If the results warrant it, additional government capital could be allocated.

There must still be cost discipline. "Australian made" is not a licence for unlimited subsidy. Competitive tendering should force technologies to compete for whatever strategic premium government decides domestic resilience is worth.

Nor can demand policy operate in isolation.

Regulation also needs to catch up with technology. Regulation should also be reviewed to ensure that frameworks written around incumbent technologies do not inadvertently prevent newer fuel pathways from competing.

Regulation should protect environmental and safety outcomes, not preserve obsolete technological categories.

Finally, fuel resilience should not be confused with decarbonisation.

Some technologies will advance both objectives, and where they do, that is highly desirable. But they are different policy questions. Decarbonisation asks how much carbon a fuel emits. Fuel security asks whether Australia can obtain the fuel when international supply is disrupted.

The lesson from the recent crisis is not that Australia's fuel system failed. It is that the system worked because Australia remained a wealthy buyer in a functioning international market.

We should not assume the next crisis will give us the same luxury.

A stockpile buys time. Domestic production buys options.