Australia needs to reduce oil imports

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.