Nesa identified Issues: Strait of Hormuz
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- The hypothetical disruption scenario
- Effect of the disruption on oil prices
BackgroundThe 2011 National Energy Security Assessment concluded that the reliability of liquid fuels supply in Australia is likely to be high in the medium term, falling to moderate in the longer term. This assessment drew on an analysis of a 30-day closure of the Port of Singapore to assess the implications of a supply disruption on the Australian economy. The assessment noted that there could be more severe disruptions than that represented by the Singapore scenario and identified domestic refinery rationalisation and geopolitical tensions in production centres as future liquid fuel security watch points. The 2011 NESA drew on an analysis of a 30-day closure of the Port of Singapore to assess the implications of a supply disruption on the Australian economy. The assessment noted that there could be more severe disruptions than that represented by the closure of Singapore The objective of this report was to assess the economic impacts of a more severe disruption to world oil supplies. The terms of reference (which are provided in an attachment to this report) require modelling of the economic impact of a major physical supply disruption represented by a blockage of the Strait of Hormuz. This scenario would represent a major crude oil supply shock, as opposed to the product supply shock examined in the Singapore scenario. The scope also required examination of the potential closure of Australian refineries on the magnitude of the economic impact. The three key questions that this report seeks to answer are: whether the scenario posed would result in a physical disruption to Australia’s liquid fuel supply whether economic outcomes would be affected by possible closure of refineries in Australia how the economic impacts of the posed scenario would differ from the economic impacts of the supply disruption represented by the Singapore disruption.
ACIL Tasman’s modelling assumed a full closure of the Strait for one week, with a partial restoration of 25 per cent of shipping flows in the second week and a full resumption of shipping in the third week Sailing times from the Middle East to Australia are around 3 to 4 weeks and sailing times from Asian refineries are around 2 to 3 weeks. At any one time, there are therefore stocks of crude oil and product on the water sufficient to meet Australia’s import needs for at least two weeks. . It was also assumed that the International Energy Agency (IEA) would announce, in the first week, a collective action to release stocks of up to 15 million barrels per day, and that these stocks would have reached the market by the end of the second week. This release of stocks effectively negates the supply shortfall from closure of the Strait by the end of the second week. The modelling scenario was developed in conjunction with the Department and the IEA, and was based on advice from a range of credible sources to represent an outcome that is considered among the most plausible, noting that any scenario would involve a wide range of political, military and economic interests from a number of countries. Appendix C provides background to past oil shocks and analysis of their impacts which informed our analysis. The economic impacts were estimated under two alternative assumptions for the elasticities of demand and supply for crude oil (‘Case A’ with higher assumed elasticities and ‘Case B’ with lower assumed elasticities) and under two alternative assumptions about the domestic production of petroleum products – one where the current 7 refineries were operating (‘Scenario 1’), the other with only 4 refineries operating after the closure of the Shell refinery at Clyde in Sydney and the Caltex refineries at Kurnell in Sydney and Lytton in Brisbane (‘Scenario 2’). In addition, the supply shock was assumed to be preceded by a speculative demand shock – a build-up of precautionary and other speculative buying due to increasing uncertainty that rising political tension and fear of closure would generate. At the conclusion of the incident, it was assumed that IEA member countries rebuilt stocks over a 16-week period. The event therefore occurs over a 23-week period and commences four weeks before the actual closure. The shock sequence is summarised in Figure ES . Figure ES Shock scenario
Source: Department of Resources, Energy and Tourism and ACIL Tasman. Effect of the disruption on oil pricesThe effects of the disruption on crude oil prices under the alternative assumptions on demand and supply elasticities are shown in Table ES . After an analysis of movements in oil prices in the period leading up to the shock, it was concluded that the price in February 2012 of around $110 per barrel for dated Brent represented the base price from which price movements were estimated. Table ES Effect of disruption on crude oil price
Data source: ACIL Tasman Over the entire period from week 1 to week 23, there is no net shortage of supply to markets (including Australia) as the IEA coordinated stock release schedule, when combined with the availability of oil on the water, ensures sufficient supplies in the weeks following closure, to compensate for the loss of around 183 million barrels arising in the two-week period of the disruption. The principal impact would be on the price of crude oil and petroleum products in all markets over this period. During the four weeks leading up to closure, petrol and diesel prices rise as the price of crude oil on world markets rises due to speculative buying and stock building. Petrol and diesel prices rise in the first halve of week five (the week of the closure) then fall back in the second half as speculative demand falls and IEA and other stocks are released into the market. The average prices of petrol and diesel during week 5 are 44 per cent and 57 per cent higher respectively than the prices in week zero under the low elasticity of demand case. In week 6, prices fall again as more stocks reach the market and 25 per cent of shipments through the Strait recommence. Prices remain elevated in weeks 8 to 23 as IEA countries rebuild stocks. Prices fall back to the original price that prevailed in week zero once the stock rebuild has concluded.
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