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As the war in Iran continues and the Strait of Hormuz remains shut, concerns over Australia's fuel supply are intensifying, given our reliance on imports for both crude and refined oil.
This week, the Federal Government announced a significant package to help support current and future fuel supply. This includes $7.5 billion in financial support to fuel companies to ensure they can purchase and store additional fuel stocks. To improve future fuel resilience, the government will spend $3.7 billion to establish a government-owned fuel security reserve and increase minimum stockholding obligations by 10 days.
This follows concerted efforts by the Federal Government to secure agreements with our key Asian suppliers of refined fuel. The agreements include commitments to keep fuel flowing and avoid placing restrictions on exports to Australia. Australia's status as a significant source of LNG for many of these countries helped to secure these agreements. Nevertheless, Asian refiners are highly exposed to the Middle East for their supply of crude oil and so disruptions to our fuel imports remain a risk.
To date, fuel flows to Australia have remained at relatively normal levels. Information from the Department of the Prime Minister and Cabinet (PMC), indicates that the next month of fuel flows are also scheduled to remain at standard levels. This has been supported by the underwriting of additional supplies of fuel through Export Finance Australia.
On this basis, we have estimated how long fuel reserves would last under reduced import flows, assuming disruptions begin one month from now.
As of the 28th of April, Australia had 43 days of petrol, 33 days of diesel and 28 days of jet fuel reserves. At first glance this seems alarming, suggesting Australia only has one month of fuel supply left. However, provided imports keep flowing to some extent, these reserves could be spread out over time to cover the shortfall.
If our imports of fuel fell severely, say by 50%, reserves would only extend supply until around August before significant supply shortages emerged. However, our calculations indicate that smaller reductions in import flows are relatively manageable. If Australia experienced a reduction in supply in line with its share of global supply, i.e. a 20% reduction in the global crude oil supply due to the Strait's closure sees our imports drop by 20%, our reserves would be sufficient to top up the difference until around the end of the year. This is the case even assuming no change to our regular consumption of fuel and no demand destruction from the higher prices.
The fall in fuel imports could be even smaller, given the work Australia has done to ensure continued normal supplies from its Asian trading partners and its status as a relatively wealthy country, willing to pay higher prices to secure supply. This is in contrast to many emerging market Asian economies that have already had to enact explicit measures to reduce fuel consumption. If flows to Australia were to reduce by only 10% instead, we could stretch our reserves out to the middle of next year.
Against this backdrop, our base case assumes that the Strait of Hormuz will reopen by the end of June. Even allowing for the roughly two-month lag between reopening, refining and delivery of fuel to Australia, we would be more than covered by our reserves under a 20% reduction in import flows. This is especially the case, as a reopening of the Strait would give refiners confidence to keep production as close to normal levels as possible. Even if the Strait reopening is delayed into the second half of this year, reserves could reasonably be expected to provide coverage.
That is not to say that a delay in reopening the Strait would lead to a benign outcome for the economy. As we have flagged in previous Weekly Briefs, the key risk in a prolonged closure of the Strait of Hormuz beyond mid-year is inflation. The longer crude oil prices are sustained at higher levels, the more they flow through into higher prices for other goods and services. This would prompt much higher interest rates from the RBA than the 4.35% the cash rate was lifted to this week. In this environment, the central challenge for the economy would not be a lack of fuel, but the consequences of elevated inflation and tighter financial conditions.
