Comparison with Singapore product supply shock

5.3Comparison with Singapore product supply shock

After allowing for the time it takes to ship crude oil to Singapore, refine crude oil, store and blend sufficient oil products, break-up cargos, and ship crude oil and refined products to Australia, it was estimated that the interruption of supply from Singapore to Australia could last for 45 to 60 days. The incident would temporarily remove around 1.72 per cent of world refinery capacity from the market (around 1.3 million barrels per day of refined product).

Key differences between the Singapore disruption and the Strait of Hormuz disruption scenarios include:

1. 
   The Singapore scenario represented a disruption in the supply of petroleum products to Australia compared with a disruption in the supply of crude oil represented in the Strait of Hormuz scenarios.
   
2. 
   The Singapore interruption was for one month as opposed to two weeks for the Strait of Hormuz interruption.
   
3. 
   The Singapore shock involved a loss of around 90 million barrels of product in total from the market over a period of around two months after allowing for start up and recovery times for Singapore refineries.
   
4. 
   The Singapore scenario did not assume a month-long build-up of stocks prior to the disruption nor a coordinated release of stocks by IEA member countries.
   
5. 
   The economic modelling for the Singapore shock was undertaken on a month-by-month basis over a period of 4 months whereas the Strait of Hormuz modelling was based on week-by-week modelling over a period of 23 weeks.
   
6. 
   The Singapore modelling assumed that unemployment arose over the period whereas the Strait of Hormuz modelling did not.
   

Table Assumed elasticities and resultant price changes in Singapore disruption scenario

ACIL Tasman’s modelling of the Singapore scenario indicated that the total loss in GDP over 4 months would be $1,382 million if the shock occurred in the short term (2011). This is significantly higher than the loss of GDP estimated for closure of the Strait of Hormuz which was calculated to be around $556 million.

The total loss in real income in the Singapore case was estimated at $2,145 million if the disruption occurred in 2011. This compares with the real income loss of $2,148 – $3,118 million over 23 weeks for the Strait of Hormuz disruption.

The Strait of Hormuz event involves a much larger disruption than the Singapore event (15 million barrels per day compared to 1.3 million barrels per day). However, its economic impacts as modelled by ACIL Tasman are mitigated by a number of factors discussed below.

While the price spike in week 5 of the case of the Strait of Hormuz is significantly higher than the price increase in the Singapore case, it is a transient event. Most of the time, the elevated prices in the Strait of Hormuz incident are caused by speculative buying before the event and restocking by IEA countries after the event. For most of these weeks, the product price rise from the closure of the Strait of Hormuz incident is less than that for the Singapore incident (see Figure ).

Figure Product price rises for Strait of Hormuz compared to Singapore

In the absence of the release of IEA stocks in the Strait of Hormuz case, the economic impact would be much higher.

A further important difference in the modelling of the economic impacts between the two incidents is the assumption about unemployment. In the Singapore incident, it was assumed that unemployment effects should be taken into account because it extended for sufficient time to allow reduced economic activity to lead to layoffs.

In the Strait of Hormuz incident it was assumed that there would be no unemployment effects as the duration of the incident was so short and that, in aggregate, the supply of oil was not lost (rather the sources of supply and speculative/precautionary demand changed resulting in short term price effects). If the labour market were made more responsive the projected loss in Australian real GDP would be expected to be five to ten times greater than the impacts reported in this analysis. Similarly, the change in real incomes would be expected to be two to three times greater.

There are other more technical differences in the modelling. ACIL Tasman refined the Tasman Global data base and modelling approach to better simulate the very short term dynamics of the supply shock for the Strait of Hormuz, including the integration of the assumed elasticities in global oil markets and specifying how the oil is supplied (i.e. from standard production or from stock releases).