Iran War Creates an Energy Crunch for Export Giant Australia

The city skyline in Sydney. Photo by Brendon Thorne /Photographer: Brendon Thorne/Blo

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(Bloomberg) — As the war in the Middle East enters its third week, Australia — with little domestic refining capacity left — underscores how even major fossil fuel exporters aren’t immune to a widening energy crunch.

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While the supply of gasoline and diesel to Australia has remained steady, the government has warned that a prolonged conflict could strain shipments. Panic buying is already pushing prices higher, especially outside the big cities, with costs rising faster than international benchmarks in the early stages of the conflict — prompting competition authorities to summon suppliers and retailers for an explanation.

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Julia Hausler, a farmer in northwestern Victoria, has watched the price of diesel at her local gas station soar by about 50%, rising to as high as A$2.69 a liter in recent days — a worry even if large buyers don’t always pay retail prices.

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“An agricultural farm doesn’t use tens of liters, it uses tens of thousands of liters to put a crop in,” she said. “Diesel’s just mission critical to getting the crop in — there are no other alternatives.”

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Hausler said that while her farm was largely supplied for the moment, the fuel challenge was front and center in her conversations with other producers around the region. “The hardest thing for farmers is that for all of our planning, we just don’t quite know what the right answer is.”

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Despite being one of the world’s biggest shippers of coal and natural gas, Australia doesn’t produce enough crude oil to meet its own needs. Add competition from newer, more efficient refineries in Asia, and the nation has been left with just two aging plants that produce less than a quarter of its fuel. For the rest, it relies on imports.   

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Australia can likely manage about 26% lower diesel imports through increased domestic production and demand-side measures, but beyond that, industrial shut-ins would be required, Morgan Stanley analysts including Rob Koh said in a report Monday. 

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The country’s top fuel suppliers have already halted spot sales — one-time transactions outside long-term agreements that typically go to smaller retailers and commercial users. 

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Over the weekend, the rush left service stations in rural areas forced to ration, while some ran dry, according to local reports. Trucking groups have raised concerns over supply outside urban areas, and caution that increased costs will be passed on.

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Those rising prices and shortages could have knock-on inflationary effects for the world, given the nation’s export-oriented mining and agricultural industries are among the biggest users of diesel. Health and transport are the other sectors most exposed to a fuel crunch, said Lurion De Mello, a senior lecturer in finance at Macquarie University. 

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“Our diesel supply depends heavily on refineries in South Korea, Japan and Singapore, and any interruption in their crude oil intake will flow through globally,” De Mello said. “There are few alternative sources.”

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Australia has about a month’s supply of diesel and jet fuel, and only slightly more gasoline, in storage for emergencies — well below the 90 days recommended by the International Energy Agency. That’s set to shrink further — with the government lowering the amount of fuel that bulk importers and refineries are required to hold in reserve by about a fifth last week, equivalent to about six days of nationwide sales.

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The government has said there is enough fuel and that any shortages are because of stockpiling. It has also temporarily amended fuel-quality standards to allow higher sulfur levels, adding more petrol to supply. 

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(Updates with comment from third paragraph.)

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