Should Australia use the COVID-19 oil crisis to build a strategic reserve?
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India’s doing it. The US is doing it too. Now that China says it’s over the worst of the coronavirus pandemic, even it’s doing it.
What they’re doing is buying super cheap oil and topping up their strategic reserves.
Which begs a question some experts have long asked: should Australia take the issue of setting up a strategic oil reserve within the country more seriously at a time when oil is cheap and plentiful?
Australia has enough storage in country for 54 days worth of oil, below the 90-day minimum stockpile it signed up to when it joined the International Energy Agency (IEA). The country imports 90 per cent of its liquid fuels such as diesel.
Oil prices plunged in early March when Russia, and then Saudi Arabia, opted out of OPEC’s production limits in a meeting that was supposed to find a way to deal with a dramatic drop in oil demand from China, then struggling to contain the coronavirus outbreak.
Yesterday prices were $US25-30 ($42-50) a barrel for the US marker WTI and the European benchmark, Brent.
But in early March, as the global impact of the coronavirus pandemic was becoming clear, the Morrison government signed a deal with the US to lease space in the 714-million barrel capacity caverns in Texas and Louisiana.
“The Strategic Petroleum Reserve is the world’s biggest emergency stockpile of oil,” Energy and Emissions Reduction Minister Angus Taylor said.
“The US is a trusted ally which has been essential for global oil security and we are glad to be building on our strong, longstanding relationship, while ensuring Australia is best prepared to act during a global oil disruption.”
The idea is to protect Australians from supply shocks and price spikes.
Geopolitical events such as the attacks on oil tankers near the key shipping thoroughfare the Strait of Hormuz in 2019 are a reminder that although prices are low now, Australia is still vulnerable to future supply disruptions.
Experts like Alan Dupont, a professor of International Security at the University of NSW, argue that with 40 per cent of supply coming from the Middle East, the country needs to strengthen supply chains by storing oil at home not in the US, which is 30-40 days of tanker travel away and currently a mercurial ally at best.
S&P Global Platts Asia oil markets advisor Lim Jit Yang says countries need immediate access to reserves when supply is required urgently.
“This would only be possible if reserves are available in close proximity, preferably within the country,” he said.
But what is good for the US, India and China may not be good for Australia.
Morningstar resources analyst Mark Taylor says while the US deal is “pretty ludicrous” because it’s half a world away, Australia doesn’t have the infrastructure at home to fill.
“In a coronavirus pandemic it’s probably pretty low on the immediate list of things to consider. I suspect it would be pretty expensive… I’m not sure that we have any natural ability to store it,” he said.
It would require construction of a lot of storage, and “that may be something you could do in a depression to give people jobs with a fiscal stimulus”.
Anastacia Dialynas, who leads Bloomberg New Energy Finance’s oil supply analysis team in New York, says if ever there was a time to create an oil reserve, it’s now.
She says Russia and Saudi Arabia are pumping as much oil as they can after years of production restrictions and no one knows when either will break and come back to the OPEC negotiating table.
US production is at record levels.
And at the same time the coronavirus pandemic is eating into demand as flights remain grounded, entire countries have been told to stay in their houses, and all but essential industries have been closed down.
But both Dialynas and Taylor point out that Australia may not need one: experts agree that the long-term momentum of electric vehicles, which are still expected to take off among mass buyers from 2023, and renewable energy may mean a sizable investment now may not be needed for long.
ANU fellow Christian Downie wrote in The Conversation last month that Australia should be looking less to its oil reserves and more how to use its massive renewable energy resources as an export and diplomatic foot-in-the-door with its neighbours.
The window the US, China and India are taking advantage of may also be too narrow for Australia to establish its own reserve.
Lim believes prices will be $US40 a barrel by the end of the year after a second half recovery.
Taylor says the Morningstar outlook hasn’t moved from from $US60 a barrel for Brent oil, the northern Europe benchmark, by 2022, based on oil demand growing every year.
Dialynas says a trigger to watch will be China. If it can restart industrial activity and keep virus cases under control, that could be an optimistic sign for other countries. If it can’t, that will be a bad sign for markets.
China is bringing its workforce back, indicated by data from the European Space Agency’s (ESA) Copernicus Sentinel-5P satellite which shows a clear uptick in the concentration of particulate matter across northern and eastern China.
Levels of nitrogen dioxide coming primarily from power plants, industry and road transport are a useful indicator of economic activity and began to increase in early March following a significant reduction from late January as quarantine efforts intensified.