Don't Be Australia

As the Strait of Hormuz crisis unfurls, more and more countries are going to find out the answer to the question: did you have a serious energy policy?

Australian FM Penny Wong shaking hands with Chinese FM Wang Yi in Beijing

Do you remember when the Iran War started two months ago? The war, we were told, was actually all about isolating China from its source of energy. First Venezuela, then Iran. One by one, or so the theory goes, America will be breaking China from its sources of cheap oil. China will have no choice but to bend the knee in the face of total American Energy Supremacy.

That is alas not exactly how the script is playing out. First of all, the Trump administration have failed to find the Iranian Delcy Rodriguez. Or maybe they accidentally killed him in a missile strike already. I’m not exactly sure. In any case, the Iranian leadership, even the most conciliatory elements, are committed to holding the Straits of Hormuz — and thus 20% of the world’s oil — hostage until a satisfactory conclusion to the war. Instead of China getting pressed, it’s America’s allies, especially in the energy-vulnerable pacific region, that are sweating.

China’s prudence vs. Australia’s folly

What we found out is that China has a formidable Strategic Petroleum Reserve, well north of a billion barrels. What’s more, they’ve continued to buy oil throughout the crisis from Russia, meaning their reserve levels have not dipped. Chinese gas purchase did drop precipitously, but we can assume most if not all of that is demand destruction, meaning the Chinese are getting by on less gas. As Bloomberg energy analyst Stephen Stapcynski comments: “China can instead turn to domestic/pipeline gas or coal” in the face of high spot prices for LNG.

The Chinese government announced a halt to its exports of refined oil products not long after the crisis broke out. But domestic fuel stockpiles are so plentiful, refiners are now applying to the state for permission to resume the export of cargoes. Now Beijing has a sophisticated instrument of diplomatic favor: precious fuel, once a commodity, now the lifeblood to ensure your economy does not grind to a halt.

This would be just in the nick of time for Australia, which is staring down a fuel crisis in both diesel and jetfuel. How does this happen for a country that is basically a gas station with marsupials?

Oil and gas everywhere, but not a drop of diesel

Australia is a top global producer for liquified natural gas, but it also exports plenty of crude. What it doesn’t have are refineries to turn that crude into products that can be consumed. In a normal market with plenty of slack, that is not a problem. But in a crude-constrained market, somewhat counterintuitively, it is the refineries that are the chokepoints.

Let me give you an analogy: imagine there is a worldwide soybean shortage (we might not have to keep imagining forever). Who would suffer more? A producer of soybean, or a processor of soybeans into meat, oil and food? You’d think the grower would be safer, but often it’s the opposite. You see, soybean is usually not eaten as-is but turned into pork, tofu or oils. A pure soybean producer have no choice but to sell their soybeans to the the global market, although they should get a handsome price. A soybean consumer however, might choose to keep their consumable pork, tofu and oils at the borders if their people are starving because in a true crisis, food is more valuable than money.

“Ah Angelica, but what producer of soybean would not also have their own pig farms or tofu factory?” Unfortunately this is exactly Australia’s position. With no distillary of its own, the producer of oil is ironically faster to run out of refined oil products compared to places that produce no oil like Singapore, Japan or Taiwan.

Penny Wong goes to Beijing

And so it is that Australian Foreign Minister Penny Wong went to Beijing to beg for fuel. Is that an overly-crude way of putting it? Well, here it is in her own words: "The whole reason I'm here is to try and press for, and advocate for, Australia's interests and for the provision of liquid fuels."

It seems ironic that Australia backstabbed France on an expensive submarine deal with the United States, the AUKUS, that was specifically designed to counter China. Now it seems like those submarines might be delayed in delivery indefinitely because America simply does not have the ability to make them in the relevant time frame. Meanwhile, a crisis that was made-by-America in the Middle East has delivered pressing shortages to Australia’s door.

Would it not have been better to have said “no” to AUKUS and used taxpayer’s money to actually make sure Australia has a true energy security plan? Then, instead of invisible submarines that might or might not “deter” China in 20XX, Australia might have the refineries that saves itself from the humiliation of going to a neighbor hat in hand.

THE ELEMENTAL TAKE

I feel like I’m picking on Australia here, but really this is the fate of every single country that does not get real with energy. As long as the Strait of Hormuz remains closed, there is a clock hanging over all of us, and at some point for every country, the alarm is going to go off.

The United States is playing chicken with Iran. The rest of the world is riding as reluctant passengers. Buckle up. It’s going to be a bumpy ride.