Australia has been caught napping with just 28 days of its emergency oil left – now it might be forced to strike a deal with Trump

Trump might be about to drive a hard bargain when Morrison arrives in Washington. (Photo by Kazuhiro NOGI – Pool, Getty Images)
  • Australia is at the biggest risk of an oil emergency shortage in years, with recent strikes in Saudi Arabia threatening the global supply, and Australia’s own reserves less than a third of their mandated level.
  • Accordingly, the Australian government has been trying to negotiate with the Trump administration for months to gain access to the US supply to relive pressure on it and reduce the possibility of running out.
  • That puts Scott Morrison in a tough negotiating position when he meets with the President at a state dinner in Washington this week. The US has previously signalled that it wants to place missiles in northern Australia and expects Australia to help secure the Strait of Hormuz amid Iran tensions.

The strike over the weekend on two major refineries in Saudi Arabia immediately wiped out 5% of the world’s oil production – and it’s Australia which could be most at risk.

That’s because Australia has long ignored its commitment to the International Energy Agency (IEA) to hold months worth of oil in reserve in case of disruption to its supply.

“As a Member of the IEA, Australia is obliged… to maintain oil reserves equal to 90 days of net imports of the previous year,” according to the IEA.

However, Australia maintains less than a third of that requirement — holding just 28 days worth of petrol and crude oil in reserve, according to the latest figuresfrom the Department of the Environment and Energy. Even if you adjust those figures against net imports, Australia has less than 60 days – or two thirds – of its mandate.

That’s partly because despite monitoring Australia’s compliance, there’s no enforcement or penalty for members that don’t meet that quota. In fact, for a country of its size and wealth, Australia has some of the smallest stockpiles. Compare that to Australia’s allies. New Zealand has 92 days of coverage, Japan has 185 days, Britain 280 days, and the US a world-beating 700 days.

The Australian government is looking to the US for help

This week, the government has been attempting to present a calm face.

“I’m not going to predict prices, but the expectation at the moment is that production will come back on reasonably quickly and we have good stocks around the world,” energy minister Angus Taylor told the ABC on Monday.

However, a timeline for the full recovery of Saudi production remains unclear, with estimates ranging from between several days to several weeks. What Taylor also neglected to mention is that Australia’s low local reserves have been a concern for much longer than this week.

Just last month Taylor acknowledged to the Nine newspapers that negotiations had been underway for some time to access the tightly guarded American oil supply.

With Prime Minister Scott Morrison in Washington, this week to meet with US President Donald Trump, those negotiations are set to continue. The recent attack and the real possibility that Australia’s emergency supply may be under threat will provide the President with more leverage to strike a deal.

High on Trump’s wish list would presumably be the housing of US missiles on Australian soil and an increased Australian presence near Iran – both proposed by US Secretary of state Mike Pompeo on his recent visit to Sydney.

Now that it’s been caught napping, it may be one of the few options Australia has if push comes to shove.

Even at full capacity, Australia can barely supply 25% of its own oil needs

The situation has been produced largely by complacency, according to think tank the Australian Strategic Policy Institute (ASPI). Australia has rich domestic reserves of gas, coal, and other energy sources, “which has led to an understandable tendency for Australian governments and society to be more sanguine about energy security than many of the other countries of the Asia–Pacific”, according a recent ASPI report.

That doesn’t let us off the hook, however. What Australia does not produce much of at all is oil – producing 0.3% of the global supply and importing 90% of the refined oil it uses, according to this year’s energy review.

That leaves the country unable to meet its own demands even if it depended on it – at full capacity, and after the deal in refining crude supplies, Australia could theoretically satisfy about a quarter of our domestic demand. That makes Australia the most vulnerable country in Asia to oil disruptions, according to an ASPI survey of 25 nations in the region.

Australia did not expect a major disruption to global oil production

It’s unsurprising then that the ASPI has for years warned that Australia should wake up to geopolitical risks.

The government has defended its position by acknowledging that “small to medium-scale disruptions” are manageable without seeing soaring oil prices. Certainly the department of energy argued in its 2019 review of national energy security that single disruptions to most shipping routes would not be an issue because of Australia’s geography.

The Saudi strike likely won’t be the last threat to the global oil supply

However, the strike in Saudi Arabia is a far bigger deal for several reasons.

First, the Strait of Hormuz is the one shipping lane out of the Middle East, the world’s largest oil-producing region. Tensions with Iran threaten to shut that down, stemming the flow of oil around the world. Second, the world’s largest refinery was just put offline in one attack that is unlikely to be the last.

READ MORE: How the Strait of Hormuz, a narrow stretch of water where ships transport $1.2 billion worth of oil every day, is at the heart of spiralling tensions with Iran

“This is not a one-off event and there are no signs of de-escalation,” RBC Capital Markets commodity strategist Michael Tran said in a note issued to Business Insider Australia.

What’s more is Saudi Arabia’s status as the “the world’s central bank of oil”, with the “additional potential attacks” restricting its ability to simply increase production to make up for the shortfall, according to Tran.

In fact, that island geography could apply additional pressure rather than relieve some, with Australia located at the end of the supply chain. As the energy department acknowledges, we source the majority of our oil from Asia, who in turn import in from the Middle East. That oil takes between 10 to 19 days to arrive in Australia from Asia, according to the Department of Energy, with longer still to make it from the Middle East.

That’s of little help now that the main shipping lane out of the Middle East is under attack, with the global oil supply looking at its most shaky in years. Particularly as successive Australian governments have failed to heed the warning of the country’s strategic bodies.

Now, Trump is rolling out the red carpet for Morrison at just the second state dinner for a foreign head of state during his administration.

The art of the deal is surely alive and well.