Australia and Energy Security

If you’re going to speculate, you could do worse than speculate on energy. The issue became even more interesting yesterday with Shell’s announcement that it would put its Geelong refinery up for sale. The downstream oil and gas business in Australia — refining oil and selling the refined fuels — is an increasingly lousy one.

But energy is arguably more than a business. It’s also a matter of national strategy, to the extent that a nation actually has an energy security strategy. Australia is already a net importer of refined fuels. Shell already closed its Clyde refinery last year and Caltex will close its Kurnell refinery next year, according to Clancy Yeates in today’s Age.

Does a 30% reduction in Australia’s refinery capacity represent a gain in economic efficiency or a loss of energy security? Economists will argue that at a national level, a country should only compete in those industries where it enjoys a real advantage. If Australia can buy refined fuels from Asia more cheaply than it can produce them in Australia, then the most efficient use of resources is to let the Asian refineries produce Australia’s fuels.

Leaving aside the trade deficit aspects of importing more refined fuels, can you make the argument that depending on your neighbours for your energy is an unwise national energy strategy? You could certainly argue that, even when your neighbours are currently friendly and eager to do business. Would you be paranoid for arguing that a country should not trust its energy security to foreign trade?

Now THAT’s an interesting question. Free trade and voluntary commerce are always a better basis for a peaceful world. People engaging in trade enjoy all the benefits of buying things they can’t produce at cheaper prices. This is how a free market distributes the benefits of the division of labour, through voluntary trade.

You only start to worry about things like energy (and food) security when national governments get involved. Governments don’t trust one another and are acquisitive by nature, both of power and resources. When you add that to the equation, then depending on trade to supply secure energy becomes a riskier proposition.

Australia wouldn’t have to worry so much about energy security if it got on with the business of unlocking its own vast resources of shale gas. There’s enough natural gas in Australia to generate power for electricity and fuel for transportation for many years to come. Why not develop it?

This will be the topic of our presentation at the Resources and Energy Investment Symposium, May 19th through 22nd, in Broken Hill. The official title of our speech is ‘Revolution in the Desert: the Geopolitics of Australian Energy’. You can bet shale gas will feature prominently. And by mid-May, we may know some crucial information about the viability of Australian shale gas.

Dan Denning
for Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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