Australia needs to reduce oil imports

[The war in the Middle East has] turbocharged fuel costs and Australians are paying a very hefty price – Treasurer Jim Chalmers

Australia is already spending $50–70bn a year buying imported fuel. We need to ask how much additional cost is economically rational to pay to reduce strategic risk attached to that dependence, and what benefits would accrue from building a more resilient liquid fuels sector.

Global supply chains make oil cheap by removing redundancy, but the price gap between ideal trading conditions, and disrupted conditions, is a delta we have to pay.

That delta can be quantified – and it is large. Instead of paying it to overseas suppliers, we should redirect it into technologies that reduce our dependence on liquid fuels where practical and, where they’re essential (eg Defence), produce them domestically, thus strengthening the economy while building resilience.

There are many causes of Australia’s OECD-leading inflation but RBA Governor Michele Bullock says the oil shock is making inflation “much worse”, and last week raised rates to their highest level since 2011.

What does imported oil actually cost Australia?

The economic case for importing fuel is straightforward. Enormous overseas refineries produce liquid fuels cheaper than smaller Australian plants, so it made sense to import the cheaper product.

But prices can rise sharply because of wars, blockades, production cuts (OPEC), tariffs, or shipping disruptions thousands of kilometres from Australia. When they do, the additional cost moves through the entire economy, causes inflation, and contributes to higher interest rates as we saw this week.

We can actually quantify the gap between business-as-usual cheap fuels, which is what the globalisation/free trade case rests on, vs what we pay in reality over time. This means we can assess the opportunity cost.

In 2023-2024 Australia imported $55bn worth of oil products, $65bn in 2025-26 and Q1 2026 running at $90bn annualised with projections of even higher prices.

Using the Reserve Bank’s pre-Iran-war oil-price of USD $63/bbl assumption as a baseline, higher crude prices alone imply roughly $18bn a year in additional crude-equivalent imports over baseline. That is a conservative measure of the shock. Australia imports large volumes of refined fuels as well as crude, and during the crisis the premiums on diesel, petrol and aviation fuel (and shipping costs) also rose sharply.

The true increase in Australia’s landed fuel bill was therefore higher.

We need to start understanding the total cost to the economy of imports over the long term, and account for shocks.

History suggests those occasions are not particularly rare.

In 2008, oil reached US$145 a barrel. In the year before the peak, Australia’s oil imports were worth about 2.2 per cent of GDP. By the June quarter of 2008 that had risen to 3 per cent of GDP, an increase equivalent to around $15 billion in today’s dollars. Petrol prices rose about 25 per cent in a year and directly added 0.8 percentage points to inflation, which had flow on effects like higher interest rates and lower growth.

Treasury provides another useful rule of thumb: a sustained 10 per cent increase in Brent oil prices subtracts roughly 0.1 per cent from Australian GDP and adds around 0.4 percentage points to CPI.

On a conservative estimate, Australia has spent around $100 billion in today’s dollars over the past 25 years simply paying the premium imposed by major global oil-price shocks. That excludes the wider economic costs of higher inflation, interest rates and lost output, and probably understates the direct fuel cost because refined-product margins and freight also rise during severe disruptions.

Australia has no control over these price changes. We’re a wealthy price taker, and until we diversify from oil we’re forced to pay the difference.

Nobody is suggesting we stop importing oil products, but it is time to question whether we should keep paying that delta, or divert the money into domestic solutions that reduce reliance on international trade. If we choose the latter, there are two main strategies.

1.      Reduce the proportion of Australian transport that depends on imported petroleum at all.

Some transport is relatively easy to electrify, especially with the explosion Chinese EV models landing in Australia. Passenger cars, urban commercial vehicles and eventually larger portions of road freight can substitute petroleum with electricity. That electricity can be produced domestically from Australia’s own resources.

Every kilometre transferred from imported petrol to domestically generated electricity reduces exposure to international oil markets. Electrification therefore has a fuel-security dimension quite apart from its environmental case and should be encouraged.

2.      Build domestic capacity in critical and hard-to-electrify sectors:

Defence, aviation, mining, heavy freight and heavy industry will continue to rely on liquid fuels. While it’s hard to get official numbers, it’s generally understood that around 75% of aviation fuel used by the RAAF is imported. Clearly, strategic resilience in these sectors should be a national priority, and that means developing domestic sources of such products using whatever Australian feedstocks and technologies prove economically and technically viable.

Australia has a wealth of untapped natural resources that can produce conventional product, and technology innovators that can produce renewable diesel and sustainable aviation fuel from biological or waste feedstocks and synthetic fuels using domestic energy.

If the next 25 years were to cost Australia another $100 billion in oil-shock premiums, we can keep paying or invest the equivalent in reducing oil dependence; cutting future import exposure, stimulating domestic industry and technology and building national resilience at the same time.

Naturally, not every domestic energy project will be worthwhile. Resilience is not an excuse for unlimited subsidy, but there should be an attempt to properly assess how our current strategy compares to the nation building one.

This is not a proposal to return to the 1970’s when Australia was essentially liquid fuels independent. It’s about understanding how much imported-oil exposure we should retain, and where it should be reduced, implementing a strategy that builds resilience in an economically rational way.