Stockpiles vs Supply Shocks

Stockpiles won't protect you against global prices

You often hear that Australia is dangerously exposed because we don’t hold large domestic reserves of crude oil or refined fuels, and it’s often implied that if we had those stockpiles then we wouldn’t be facing the current surge in prices.

I’m not so sure.

Petroleum reserves are an insurance policy. But like any insurance policy, whether they’re worth having depends on the risks you’re actually insuring against. And when it comes to oil, there are really two very different types of “supply shock”.

The first - and by far the most common - is a standard price-mediated shock. Global supply tightens, prices rise, and the market clears at a higher level. Think wars, sanctions, refinery outages, or coordinated production cuts. Oil still flows; it’s just more expensive.

In that world Australia is not special. We import the vast majority of our fuel, and the price we pay is set on international markets. If the global price of unleaded goes up, we pay more.

Now suppose the government releases fuel from a domestic reserve. Would this help?

Not much. The additional supply might reduce our need to import slightly, but it doesn’t change the global price which is what sets the petrol companies marginal cost. The same tankers are still heading to Australia, priced off the same benchmarks. We’re a price taker. You might get some short-term smoothing, perhaps a bit less volatility, but you don’t solve the underlying problem of a high global price.

The logic is very similar to how additional free renewable power won’t lower the price of electricity if it is still expensive gas power that is the marginal producer.

So if most oil shocks look like then fuel reserves don’t buy you very much. The same as also true of increasing the domestic refinery capacity, as long as you are integrated with the world market prices will be set by global conditions - not by local production capacity.

Quantity has a quality all of its own

The second type of shock is much more extreme. This is where supply isn’t just expensive it’s completely unavailable at any price. Think export bans that actually bind, physical disruption to shipping routes, or an outright conflict that prevents fuel from reaching Australia.

This is the scenario where a national fuel reserve actually matters. If imports are cut off, domestic stockpiles become the only thing keeping essential parts of the economy running—transport, agriculture, emergency services, and, in the extreme, the military.

Currently though we still sit very much in the first type of shock. Despite the reports of export bans they haven’t become a binding constraint on our ability to import petrol. We just have to pay for it.

I can imagine the scenarios where the price of unleaded fuel soars incredibly high, but Australia, being a wealthy country, is always going to have a very high willingness to pay for petrol. And while we might dislike paying, I'm pretty sure we'll be able to outbid comfortably the rest of the world, even in a world of scarce energy reserves.

We saw exactly this when it came to the energy crisis during the invasion of the Ukraine. Europe got cut off from a large energy source in an effectively export ban-like situation. And instead, they bought LNG from all around the world, which cost them money, but they were able to do so because they were more than able to outbid large parts of Asia for the LNG gas.

Diesel desert

Which brings me to something that does look genuinely puzzling: the periodic reports that independent regional wholesalers can’t get supply, particularly diesel.

Because if this were purely a market problem, the incentives should be obvious. Diesel at the pump might be around $3 a litre, give or take. But if supply were genuinely tight, you’d expect someone to step in, secure a shipment, and sell at a much higher price—$4, $5, whatever clears the market. At those prices, the arbitrage opportunity should more than justify the logistics.

And yet, that doesn’t seem to be happening. And it’s a bit unclear why.

Part of the story seems to have been the increase in speculative demand leading to the spot market collapsing in favour of long term contracts. Petrol stations that relied on the spot market were unable to find additional supply until the market adjusted. Another possible explanation is that there may be a perceived risk of backlash from charging higher prices —whether through scrutiny from the Australian Competition and Consumer Commission, political pressure, or just public outrage. Selling diesel at $5 a litre in a regional town might be economically rational in a shortage, but it’s also the sort of thing that attracts headlines and invites intervention.

This is the sort of edge case where the national stockpile might be helpful, supplying a small share of petrol stations that due to some market quirks are unable to get some on their own.

But most oil shocks are price shocks. In those cases, reserves don’t do very much. The scenarios where reserves really matter—complete physical disruption to imports—are much rarer. Not impossible, but not what we’ve typically observed, even today. Reserves aren’t really about making petrol cheaper in bad times. They’re about making sure the country can still function in truly extreme ones.