Nations will release an extra 400 million barrels of oil to the market. All we need to do now is not panic at the pump
- Written by Tony Wood, Senior Fellow in Energy and Climate Change, Grattan Institute
Despite being one of the world’s top exporters of fossil fuels (coal and gas), Australia has little left of its own oil. Neither does New Zealand.
Both Australia and New Zealand sit at the end of a long supply chain for their transport fuels. The US-Israel war on Iran has led to this supply chain being squeezed. Iran’s move to shut down the crucial Strait of Hormuz has effectively frozen 20% of the world’s oil trade. Three ships were hit by projectiles in the strait yesterday.
When supply reduces, we expect prices to rise. That’s why petrol and diesel prices have shot up. Farmers and trucking companies are worried about possible fuel shortages, especially for diesel.
Many people will wonder why governments aren’t acting. But they are not sitting idly by. Australia and New Zealand are among the 32 member nations in the International Energy Agency (IEA) that have agreed to release reserves of oil to tackle price spikes, though it’s unclear how much this will help.
New Zealand’s fuel reserves could last perhaps four weeks if all new supply was completely cut off, while Australia has a little more after recent expansion of fuel reserves.
It’s important not to panic. Losing 20% of oil supply affects prices. But the other 80% of oil is unaffected by the war. Current price spikes are likely to be more affected by panic buying and perhaps even price gouging than by an actual supply shortage.
What are authorities doing?
Yesterday, the IEA announced its members would release a collective 400 million barrels of oil onto the market to try to bring oil prices down – the sixth and largest release in the agency’s history.
Globally, oil prices have spiked 25% since the Iran conflict began on February 28. In turn, petrol and diesel prices have risen at the pump.
Some have asked whether prices rose before supplier costs increased. This is something the Australian Competition and Consumer Commission is watching. Commissioner Anna Brakey has said:
we are closely watching market behaviour and if there is conduct that is collusive or misleading or deceptive, we will investigate it and take action where appropriate
New Zealand’s Commerce Commission is watching closely as well. This scrutiny won’t fix supply problems, but it could avoid price gouging.
Australia has just two oil refineries left in operation, down from eight about 20 years ago. New Zealand’s last refinery closed in 2022. As refineries have closed, their fuel storage capacity has gone too.
This is one reason why Australia has long fallen short of the goal set by the IEA to have 90 days’ worth of stored fuel. In 2018, diesel reserves fell as low as 16 days. To counter this, the Morrison government arranged in 2020 to store more fuel in the United States, while the Albanese government has been expanding domestic reserve capacity – especially for diesel, which fuels trucks moving freight around the country.
After the Ukraine conflict began, the government introduced minimum stockholding levels for fuel companies.
So while 36 days of petrol, 32 days of diesel and 29 days of aviation fuel sounds low, it’s more than it has been for a long time.
As wars and tensions increase around the world, the Australian government may have to expand these reserves again.
What else can authorities do?
Federal energy minister Chris Bowen has blamed price spikes on panic buying. This is a big factor – many people are filling up ahead of expected price surges.
If petrol and diesel prices stay high, we can expect to see more calls for action.
The problem is, the government can’t do too much in the short term. It can’t easily increase supply into Australia. If it moves to cap petrol prices, this would quickly send suppliers broke. If suppliers are profiting excessively by raising prices well above the higher costs, this is something the ACCC will examine.
Releasing reserves onto the domestic market could temporarily drop prices. But Australia and New Zealand’s reserves are not huge, which limits how effective this could be. If the Iran conflict drags on, it could even prove a bad move.
Over time, unaffected oil producers such as the US will likely raise their output. Embargo limits on Russian oil are being loosened.
Don’t forget gas
Gas from Qatar – the world’s second-largest producer – has also stopped flowing. Gas prices have risen far more than oil in Europe and Asia – up by 50%.
After Russia invaded Ukraine in 2022, gas prices skyrocketed globally. While Australia is a major gas exporter, domestic gas prices usually follow international prices. In response, the Australian government put a domestic price cap on gas of A$12 a petajoule. This, it turned out, didn’t do much to lower prices. But over time, prices fell back.
Right now, Australian gas exporters are profiting hugely as the supply from Qatar has stopped. But windfall profits at the expense of Australian consumers can – and, I argue, should – be taxed.
What’s next?
This fortnight has shown how vulnerable Australia and New Zealand’s supply chains are for their transport fuels. This crisis should prompt policymakers to take a hard look at how else we can boost our resilience in what is becoming a very uncertain world.
Authors: Tony Wood, Senior Fellow in Energy and Climate Change, Grattan Institute
