In 2013, Shell closed its Clyde oil refinery on the Paramatta River, and a year later, Caltex closed Kurnell on Botany Bay.
That was the moment when Australia went from being mostly self-sufficient in petrol and diesel to relying on imports.
The oil shocks of the 1970s had been forgotten. We endured stagflation during that decade like everybody else, along with a brutal recession in the middle of it, but we were 70 per cent self-sufficient in oil and liquid fuels, so at least we could get around.
The refinery closures seemed like a reasonable idea at the time: they were losing money, unable to compete with the far bigger refineries in Singapore, Japan and Korea, and the government had just produced an energy white paper that said imports would do fine.
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It said: “The decline in Australia’s domestic refining capacity (following announcements of the Clyde and Kurnell refinery closures) is not considered to impair Australia’s liquid fuel security … Substituting imports of crude oil for imports of refined fuel at this scale does not pose any additional risk to market security.”
Famous last words.
And to be fair, the early 2010s were the years of peak globalisation, when it seemed all trade barriers were on a one-way trip to elimination, and the global oil price had collapsed from $US115 a barrel to under $US40 because of the US shale boom.
That was also before US President Donald Trump arrived and ruptured the global order, and America became “a revisionist power”, as Singapore’s minister for foreign affairs, Vivian Balakrishnan, said last week.
But there were signs then that the Strait of Hormuz shouldn’t be taken for granted.
The spectre of Iran
In early 2012, Iran started enriching uranium to 20 per cent purity at a reinforced underground facility in Qom.
The US and Europe were alarmed at this and responded with ferocious sanctions.
The Central Bank of Iran’s external assets were frozen, it was disconnected from the SWIFT global banking network, Europe banned imports of its oil, which had been 20 per cent of Iran’s exports, European insurance companies were banned from insuring Iranian tankers and the US said it would not do business with any country that imported Iranian oil.
The bargain made by ships crossing the Strait of Hormuz
Iran said it would close the Strait of Hormuz, that “not a drop of oil” would pass through, if the sanctions weren’t lifted.
But the US and Europe held firm, and the strait stayed open.
Three years later, in 2015, Iran signed an agreement with the US, UK, France, Germany, Russia and China called the Joint Comprehensive Plan of Action (JCPOA), in which it agreed to limit enrichment to 3.67 per cent and pause its nuclear weapons program for at least 10 years.
At the same time, another Australian refinery closed — Bulwer Island at the mouth of the Brisbane River in Queensland. A few years later, two more refineries joined it on the scrap heap of Australian self-sufficiency, leaving two that are still standing — Ampol’s in Brisbane and Viva Energy’s in Geelong.
And really, it did seem OK, or at least not disastrous. Iran was compliant, the gulf was open, and there was a global glut of oil because of US production; on December 21, 2015, the crude oil price bottomed at an 11-year low of US$36.05.
But then in 2018, Trump cancelled the JCPOA and reimposed all the previous sanctions on Iran, saying it was the “worst deal ever negotiated”.
Decade-old decisions come home to roost
It clearly wasn’t that (there are many contenders for that prize), and the suspicion at the time was that he pulled out of JCPOA because it had been signed by former US president Barack Obama.
But he did have a point. The deal only lasted until 2025, didn’t prevent long-range ballistic missiles and gave Iran a cash windfall that it was able to spend on funding Hamas and Hezbollah.
But as Obama’s secretary of state, Antony Blinken, commented last week: “The Obama administration put Iran’s nuclear program in a box, President Trump let it out.”
In any case, after the JCPOA was cancelled, Iran abandoned the 3.67 per cent purity limit on uranium enrichment and went for it.
Five years later, in March 2023, the International Atomic Energy Agency found uranium particles enriched up to 83.7 per cent purity — near enough to the 90 per cent required to make a bomb — at its Fordo plant under 90 metres of solid limestone and dolomite rock, just outside Qom.
Six months after that, the Iran-funded Palestinian group Hamas went into Israel and murdered 1,200 people, and everything in the Middle East changed again. In response, Israel levelled most of Gaza.
In June last year, Trump dropped “bunker-busting bombs” on Fordo and declared the facility had been “obliterated”, but on February 28 this year, they had to go and obliterate it again, along with a school full of children and buildings in Tehran.
And now confusion reigns. In the past few days, Trump has simultaneously said the US has won the war, is winning the war, needs no help to win the war, needs help to win the war.
“Regime change”, the achievement of which was the reason Israel persuaded America to bomb Iran in February, is out of reach without a full-scale American invasion of Iran, which seems a step too far even for Trump.
And now the Strait of Hormuz really is closed. Only 5 per cent of the normal traffic is getting through, although whether that’s because insurance has been cancelled or because shipping companies simply don’t want to brave the channel is unclear.
On February 28, the Iranian Revolutionary Guard Corps declared the Strait of Hormuz closed and threatened to “set ablaze” any ship trying to go through.
A few days later, maritime insurers issued cancellation notices for the Persian Gulf, which sealed it, leaving Australia with about 20 days of diesel.
So, decisions made more than a decade ago are coming home to roost.
LoadingThis oil shock is different
Finally, it’s worth understanding the difference between this oil shock and the ones in the 1970s.
In 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on the US and a few other countries because of their support for Israel in the Yom Kippur War, which had started from an attack on Israel by a coalition of Arab states led by Egypt and Syria.
Separately, they increased the crude price from $US3 to $US12 a barrel.
While the embargoes were lifted in March 1974, the oil price never again went below $US12.
It was increased again in 1979, also by an Organization of the Petroleum Exporting Countries (OPEC) decision, under the cover of the Iranian revolution.
By 1980, the crude price was $US40 — not because of supply shortages but because of decisions by OPEC to exert its power and to get rich, which the Arab states did, in spades, happily buying assets in the capitalist west while Iran stayed ferociously anti-capitalist, anti-imperialist and anti-Zionist.
This time, the price is being pushed up not by exporters but by traders on the commodity spot and futures markets, responding to their predictions about supply and their feelings.
The producers of oil and gas, or at least those operating at a safe distance from Iran, are loving it.
The difference means that this oil shock is both more dangerous and less dangerous.
Less, because commodity futures prices can and do crash more quickly than they rise.
More, because this war is an endurance test, not like the 19-day Yom Kippur War that caused the 1973 oil shock or the Six-Day War in 1967 that preceded it.
A prolonged shutdown of the Persian Gulf would be far more damaging to the global economy than an oil price rise, even a 1973-style quadrupling.
Inflation is bad, but the absence of fuel is crippling.
Alan Kohler is finance presenter and columnist on ABC News and he also writes for Intelligent Investor.
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