Australia is rocketing into the future on the smell of an oily rag. Literally. The latest report on Australia’s liquid fuel security isn’t pretty for those who like to explore the edge of the bell curve. That’s why today’s Weekend Daily Reckoning will ponder the wisdom of relying on centralised systems.
Our entire economy – including food and health supplies – is hugely dependent on a functioning, efficient transport system. And this transport system is entirely dependent on oil. According to the report, there’s been no diversification here as in other sectors of the economy since comparable figures were taken way back in 1973. No oil, no transport system. No transport system, no supply of much of anything. Stock levels, from petrol stations to chemists to supermarkets, would last less than a month if put under stress. There’s almost no slack in the system.
Or, as the report puts it:
‘Unfortunately, our unwillingness to assure our liquid fuel supplies puts at risk many of the societal functions that we take for granted. For example, without an adequate supply of liquid fuels we could not access health services; food production and distribution would be severely curtailed; most businesses could not operate; our personal and much of the public transportation system could not function; and our Defence Forces could not operate. Essentially, our society as we know it would cease to function.‘
That’s the type of scenario you have to entertain when you’re almost almost entirely dependent on global supply chains for refined fuel products. But government policy, such as it is, includes basically no contingency for a breakdown in the global markets that currently provide our supply.
That’s when Australia’s domestic oil refining capability is both ageing and declining. Shell closed its NSW Clyde refinery last year. The last refinery in NSW at Kurnell will shut down by the end of this year. The outlook isn’t getting better for the remaining ones.We’re heavily dependent on crude oil. Our fuel reserve stockholdings are below our international obligation of 90 days.
Conclusion: hope like hell the world stays sane and keeps the oil flowing.
Of course, as our colleague Dan Denning mentioned this week, you COULD argue Australia’s model of being almost entirely import dependent is perfectly sensible. Fuel can be refined more cheaply at large refineries in Singapore and around the Middle East. Australia can concede it has no comparative advantage in this industry and direct resources elsewhere. But you’d also have to foreswear the idea that there is such a thing as national self-interest that requires something resembling an energy policy.
You also have to keep your faith in the durability of a large, centralised network. That brings us to the hushed up attack on a Californian power station which the Wall Street Journal revealed earlier this month.
The attack was actually last year, in April. Someone cut the telephone cables before 1am. Snipers then shot out 17 giant transformers that power Silicon Valley. They must have known the response time of the cops, because one minute before they arrived the shooters disappeared and haven’t been seen since. The attack took an hour, but the repairs to bring the substation back online lasted 27 days. It was also the day after the Boston bombings. Nobody knows (or is saying) who was responsible.
What it did do is send a message that the US grid is vulnerable. Dan Denning argues that this is more proof that the world of centralised production and distribution (of power, of manufactured goods, of money) is both under attack and becoming obsolete anyway. The question is will it be replaced before it’s destroyed?
The answers to this kind of disruptive attack on communication and power lines is what guest speaker John Robb will be discussing at our upcoming conference World War D: Money, War and Survival in the Digital Age (check it out here if you’re interested).
But here’s a point he made about it at the time of the news breaking:
‘The black art of taking down a grid is network analysis. Find the right node at the right time and an entire region comes down. The more load on the system (afternoon + late summer + heat wave) or in combination with a denial of supply (from out of state based load suppliers) the bigger the cascade of failure.‘
Hopefully Robb will let us know if he thinks it’s a practice run for something bigger, and if the global trend is for a growing number of these kinds of attacks.
There also seems to be a lesson in here when it comes to Australia’s fuel reserves and refining capability. It might sound familiar to investors: the world’s a lot less risky when you’re diversified.
for Markets and Money
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