Should we strive for ‘energy sovereignty’?

All nations — with the possible exception of North Korea — depend on other nations for goods, services, commodities and security. There are two concepts used in economics to explain why: comparative advantage and gains from trade. At their simplest, these concepts hold that countries should focus on producing things where they can do that better and cheaper than others; and they should buy from others where that is not the case. Everyone ends up better off as a result.

Australia’s dependence on imported fuel is a classic example. We don’t have a lot of oil reserves, and the crude oil we do have isn’t suitable for use in our oil refineries. It makes sense to send our crude to Asia to be refined in large refineries that can do so cheaply, and then buy that back (and more) as petrol, diesel and aviation fuel. And it makes sense to import crude to use in our refineries.

The gains-from-trade theory hangs off a skyhook, however: it assumes that there aren’t barriers to trade. The closure of the Strait of Hormuz yanked that skyhook away — hence the sudden interest in “energy sovereignty”.

Can we protect ourselves from disruptions by reducing trade?

Two camps are emerging: those who want to reduce dependence on oil imports by doubling down on locally produced fossil fuels and relaxing environmental standards; and those who want to reduce dependence by encouraging a switch to electricity instead of using petrol and diesel. Neither will completely protect us from future geopolitical shocks. Both come with costs and both challenge our sense of fairness.

Doubling down on locally produced fossil fuels is a very short-term solution, and it comes with medium and long-term costs. Australia only has enough crude oil reserves to supply about six years of fuel at our current consumption rate. There is speculative interest in drilling for oil in places like the Taroom Trough in Queensland, but if these weren’t economic during the 1970s fuel crisis, they are unlikely to be so now.

Increasing dependence on fossil fuels is unfair to young people, moreover, because it adds to the huge costs of climate change that they will already have to bear. It’s also asking everyone to accept being poorer: in many cases the electric or renewable option may be more expensive up-front but its low running costs mean it’s a saving in the long run.

Straightforward choice? Not exactly. Gains from trade come into play again. Australia’s comparative advantage is producing the minerals that are used to make solar panels, electric cars, and wind turbines; other countries have the comparative advantage in manufacturing them.

Shifting to all-electric means relying on different supply chains. While these supply chains can still be disrupted, that disruption has a different effect on us. Every solar panel, wind turbine or electric car that is already in the country will continue to work. Disruption only slows our capacity to buy additional ones. 

There are fairness implications, too. People who already have an electric car and solar on their roof to charge it are much better off than those who don’t. But large numbers of people are locked out of these benefits. If you rent your home, you don’t usually have solar; if you live in an apartment charging an electric car is not straightforward. It would be counter-productive to reduce dependence on overseas oil only to widen the inequality gap.

LNG exports and the problem of fairness

There’s another aspect of gains from trade in fuels that should be mentioned — and that’s gas exports. Australia is one of the world’s largest gas producers, but as a result, Australians who want gas should be prepared to pay as much as customers overseas. There are perpetual complaints about high gas prices as a result, and perpetual fears of shortages. 

When it comes to gas, the gains from trade are harder to see. The gas we export to Japan may end up in a power station that provides electricity to an office building where an engineer designs a washing machine that is then manufactured in China and sent to Australia. But to many this doesn’t feel like a fair deal, and it raises many questions.

Why should Australians pay more for “our” gas just because other countries are prepared to pay more for it? Why aren’t gas companies paying their “fair share” of tax? Is it right that companies overseas on-sell “our gas” to third countries? Should gas be exported for high prices if that creates a shortage of gas here? 

Better taxation of gas exporters would be a partial solution to this. The government’s move to establish a gas reservation might help prevent shortages. In the current fuel crisis, the government has been keen to emphasise with foreign governments that energy security goes both ways. Some of the countries that supply most of our fuel are also big buyers of our gas. This gain-from-trade wasn’t visible to us until one side of it was disrupted.

What kind of nation do we want to be?

The current disruptions to fuel supply are forcing us to confront tough questions about the relationships between citizens, consumers, companies, governments and other countries. Are we comfortable with relying on others to do the right thing by us — whether that is refraining from fuel use so that others have access, or using gas exports to leverage access to fuel? Are we willing to pay more to be protected from economic pain and logistical disruption? And should that cost should be born now, or kicked down the road for younger generations to bear?

Theories like gains-from-trade can help us part of the way to answers and unpick the strengths and weaknesses of concepts like “sovereignty”. But public policy always has to balance efficiency with fairness, economics with emotion. Ultimately, the answers rely as much on an understanding of who we want to be — as people, as communities and as a nation. 

We will always rely on other countries, and them on us. Being an open trading nation has served us very well economically. Our challenge is to make sure this also reflects our sense of who we are and what we want our children to have. Get it wrong, and we lock ourselves into an isolated, expensive and dirty future. Get it right, and we can insulate ourselves from global disruption, save money, trade with others and help limit climate change. 

That feels to me like who we are.