Energy security fears follow oil refinery closures

Shell's move to put its Geelong refinery on the auction block has again brought questions of energy security to the fore.

Shell's move to put its Geelong refinery on the auction block has again brought questions of energy security to the fore.

With dwindling refining capacity, how would Australia cope if petrol supplies were suddenly cut off by a war, a natural disaster or other catastrophe?

It seems alarmist, but these are the type of questions raised by the steady decline in domestic refining - the trend that caused Shell to put its Geelong refinery up for sale on Thursday, with the option to close it if it can't find a buyer.

A decade ago, Australia exported more liquid fuels, such as petrol and jet fuel, than it imported. Thanks to fierce competition from lower-cost "mega refineries" in Asia, this is no longer the case.

In a sign of the pressure on profitability in the sector, Shell closed its Clyde refinery last year and Caltex said it would close its Kurnell refinery next year.

Once these closures are complete, Australia's capacity will have been reduced by 28 per cent and just over half of our fuel will be refined domestically. If Shell also closes the Geelong refinery, the nation's refining capacity would be cut by another fifth.

To some, this growing reliance on overseas sources is a big concern.

The Australian Workers' Union told a parliamentary inquiry that relying on Asian refineries was "highly questionable as these Asian refiners may be unsustainable - and cut off from global supply chains of crude oil".

However, policy makers bluntly reject calls for greater energy self-sufficiency.

Put simply, economists argue we should specialise in the types of energy production where Australian companies can compete globally. The oil refineries closed in recent years did not fit this bill.

Last year the House of Representatives economics committee found oil refiners were at a "competitive disadvantage" because of ageing facilities, higher operating costs, inadequate infrastructure and the high Australian dollar.

Yet it said recent closures did not compromise energy security, because the rapid growth in refining in Asia meant the market was likely to be oversupplied for years to come.

A dwindling refining industry also has little impact on consumers. The retail price of petrol is set by the cost of imported oil - so the consumer watchdog is confident that prices are not affected by refinery closures.

The alternative to allowing refineries to collapse would be taxpayer support for the industry. But as shown by the experience with car makers, these policies often lead to rent-seeking and never-ending demands for more funding.

Perversely, government support could also undermine the incentive for companies to invest in alternative sources of energy such as biofuels, or even electric cars.

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