Should the U.S. Be Concerned About Australia's Energy Security Model?

In the U.S. it is almost unthinkable for a politician of any political stripe to discuss the topic of energy without mentioning the desire of Americans to get more energy at home and less energy from foreign sources. In this year’s State of the Union address President Barack Obama stated: “But with only 2% of the world’s oil reserves, oil isn’t enough. This country needs an all-out, all-of-the-above strategy that develops every available source of American energy.”

GOP presidential contender Mitt Romney also sees energy security and energy independence as inextricably linked: “It doesn't make sense to me to send $1 billion a day out of our country. We can be energy independent and should be.” This discussion may take the form of arguing for more drilling or it may make the case for developing more domestic renewable energy but most Americans seem to agree that energy security means less dependence on imported oil: A recent poll showed that 89% of consumers favor expanding the number of energy projects in the U.S. 

Now take Australia. In December the Australian Ministry for Natural Resources, Energy and Tourism, released a draft energy White Paper entitled Strengthening the Foundation for Australia’s Energy Future. This strategy articulates a far different perspective on energy security: “The findings of the Australian Government’s 2011 National Energy Security Assessment show that energy security does not depend on energy independence or the ability to be self?sufficient.”

Given Australia’s growing importance as a strategic American ally, the U.S. should take a hard look at Australia’s new energy policy.

Unlike the U.S., Australia has made a policy decision that energy security is not based on energy independence or self-sufficiency but instead on an interconnected globalized energy market. According to the White Paper, “Pursuing self?sufficiency in energy resources such as liquid fuels can impose unnecessary higher costs on consumers without necessarily providing a material economic or strategic benefit.”

Australia consumes about 946,300 barrels per day and imports 716,700 barrels per day with nearly all the refined production coming from Singapore and small amounts from South Korea and Japan. The amount of imported refined oil will increase over the coming years because Australia’s seven major refineries have trouble competing with mega-refineries in Asia which means several will likely be shut down.

You might think that because of this trend Australia would be building up domestic strategic reserves. But that is not the case either.

Unlike other International Energy Agency member countries (most developed Western and Asian nations), Australia does not hold government?owned strategic stock to manage supply during a short?term shortage. Instead Australia’s strategy is to rely on markets to manage liquid fuel supply constraints without government intervention and to allow price increases to reduce demand.

As an IEA member Australia is required to hold stocks equivalent to 90 days of supply but in recent year Australia has fallen bellow 90 days usually to the 10-day supplies held at refining terminals.

With most refined product coming from Singapore there is reason for concern that a natural disaster, conflict in the South China Sea, or obstruction of the Straits of Malacca could leave Australia without adequate supplies of oil within 10 days.

Though, as the Australians argue, other routes could be used in the event of emergency, it is still worth closer U.S. examination of this strategy.