The fuel price spikes we’re seeing in Australia are having a massive impact on our transport customers and we will soon all feel it in the form of higher prices for almost all goods. This episode has clearly shown how exposed Australia is to fuel supply shocks and a major weakness we must address to survive and thrive in the new world of high sovereign self-dependence.
Here are four things I think we should be seriously accelerating on this front:
1. Supply chain electrification everywhere we can
The simplest way to reduce external fuel supply dependency is to use energy we can produce ourselves, and electricity can be produced almost everywhere. Electrification isn't great for every logistics use case yet, but it is viable and rapidly improving for many. Port operations, site-constrained equipment, last mile delivery and other short distance or contained operations are all ripe for electrification.
Yes we need to build infrastructure, but that is an investment aligned with our independence, technological advancement, and often highly recyclable and reusable. We also need to support operators, especially smaller ones, to move to electric solutions at a near cost-equivalent rate to diesel solutions. There’s no reason this can’t be done other than ideology and lack of commitment.
2. Replace Fuel Excise with a Road User Charge
The current fuel excise + Fuel Tax Credit system ties the cost of road use directly to the price of crude oil. Additionally, the net cost of fuel for an operator is variable and somewhat opaque due to the FTC component that is uncertain and recovered in the future.
A distance-based Road User Charge would separate road costs from fuel commodity prices. This wouldn’t prevent shocks from fuel prices being felt, but it would give the government a clearer way to provide targeted relief to industry (with less backlash about fossil fuel subsidies as a bonus), provide operators with a clearer picture of fuel cost (no potential future FTC to deduct from price paid act purchase), and it would eliminate the cash flow burden placed on operators of paying excise upfront and waiting to claw it back via the ATO.
3. Develop and fund a fuel security strategy that is appropriate for the risks we’re facing
The current framework stems from the Fuel Security Act 2021. The world has changed dramatically since then and the legislation doesn’t only covers a narrow range of issues, mainly related to stockpile volumes. We need a broader strategy that addresses how we protect local industry and essential services from price shocks, a clear plan to sustain supply and fair distribution when there are shortages, and a clear set of initiatives to mitigate the risks of future external events causing large shocks in the first place.
Those initiatives also need funding and focus that aligns with their national importance. Total funding across all current programs associated with the fuel security bill is under $4 billion. That's less than half a single AUKUS submarine, or about 10% of one year's NDIS spend. Which is crazy considering that without fuel, many essential services that we all depend on can’t operate. If that’s not a national security priority, I’m not sure what is.
4. Develop fuel hedging products for small businesses
Large businesses can hedge fuel costs, small ones can’t in Australia because there are no available instruments. Some fuel providers offer fixed price bulk purchases but they are don’t offer the same standardisation or ease of access as a market traded product.
While there are significant complexities involved, this has been done in other markets like the UK. Australia’s diesel fuel consumption is actually more than the UK (largely due to mining plus long distances and high vehicle masses) so a viable product should be possible. Industry bodies like the Australian Trucking Association could play an important role, by pooling members volumes to negotiate collective hedging arrangements and provide price certainty that today only large corporates can access.
The crisis in the Middle East may subside soon, or it may continue for much longer than we expect. But in either case extensive damage has already been done, so fuel costs are likely to stay elevated and supply limited. In an ever more uncertain and hostile world, resilience needs to be built before the (next) crisis hits.
