First war, then fire: Australia’s fuel crisis set to hit harder

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SYDNEY - Australia has been dealt a fresh blow in its efforts to contain a fuel crisis triggered by the Iran war, just as government measures were beginning to ease shortages and bring down petrol prices.

Canberra has sent delegations to key trading hubs, underwritten oil shipments, relaxed diesel standards, cut fuel taxes and tapped reserves in response to shortages and price spikes.

Those measures had begun to ease some of the pressure, with the cost of petrol falling more than 10 per cent from a record high at the end of March. 

That progress is now at risk of unravelling after a fire at one of Australia’s two remaining refineries cut the plant’s petrol production by about 40 per cent and diesel output by roughly 20 per cent from normal levels.

“This is an incident that obviously is regrettable, particularly given the timing,” Prime Minister Anthony Albanese said on April 17 about the blaze at Viva Energy Group’s Geelong refinery, which started on the night of April 15 and was extinguished on April 16.

“The fact that 60 per cent of petrol production is continuing is actually very positive, given the circumstances.”

The plant normally provides about a quarter of Victoria state’s – or 10 per cent of the nation’s – petrol and it is not clear when full production will resume.

Viva is confident it can cover the output shortfall through imports and expects no impact on Victoria’s fuel supply or prices following the fire, chief executive officer Scott Wyatt said at a press conference with Mr Albanese. 

But with the Iran war tightening fuel supplies, competition and prices on world markets are high. 

Despite being a major producer and exporter of energy, Australia sources the vast majority of its refined fuels from overseas and holds among the lowest stockpiles in the developed world, leaving it acutely exposed when global supply is disrupted.

That has amplified the impact of the Iran war, which hindered supply from the Persian Gulf region, contributing to widespread fuel shortages and rising prices.

“You can be heavily reliant on imports, or you can hold minimal reserves – but you cannot be both,” said Rystad Energy’s Australia head Gero Faruggio. 

With the disaster compounding already tight supplies, Mr Faruggio said he “cannot see how Australia avoids” demand reduction measures, further reserve releases and the prioritisation of fuel for critical sectors such as farming, freight and emergency services.

That is assuming the war in the Middle East ends soon. 

“Even if a ceasefire were declared tomorrow, the best-case scenario still sees fuel supply chains disrupted for a further two months,” he said.

“The Geelong fire does not replace that problem – it sits on top of it.

“The combined impact on Australia’s domestic diesel and jet fuel supply is severe, and the price consequences for consumers, freight operators, and aviation will be significant.”

The government has said that it is not yet considering demand reduction measures, instead leaning on its regional relationships across Asia to secure more fuel supplies.

Australia has secured an additional 100 million litres of diesel from Brunei and South Korea – the first under new strategic reserve powers whereby the nation underwrites the cost.  

“This is the first of many expected shipments secured,” Mr Albanese said on April 16 in Malaysia during a state visit to Australia’s main source of crude oil.

“Additional fuel can be directed to where it is needed most, including to our farmers.”

However, the secured volume of diesel only represents about a day’s worth of total Australian demand. 

Meanwhile, the impact of higher fuel costs is hitting households.

The central bank has said inflation remains too high, even after two interest rate hikes in 2026, while the Westpac-Melbourne Institute Consumer Sentiment Index in April fell the most on a monthly basis since the onset of the Covid-19 pandemic.  

“Given the double whammy of rate hikes and surging fuel costs, we are likely in for another round of per-capita consumption recession in the next few months,” said Ms My Bui, a Sydney-based economist at AMP.

“It will be rather tough times ahead for both consumers and businesses.”

The fire at Viva Energy’s refinery adds a “major wildcard” for Australia’s inflation outlook, according to University of the Sunshine Coast professor Sajid Anwar.

It is likely that interest rates will remain higher for longer as a result, he said.

Meanwhile, companies are also expected to feel the crunch. Melbourne-based Datt Capital’s chief investment officer Emanuel Datt said the fuel crisis – including the refinery fire – is likely to drive a “consistent stream of earnings downgrades over the coming quarter”, with sectors such as industrials, logistics and mining disproportionately affected.

“Fuel is an input to almost everything,” he said. “Higher energy prices will broadly increase the cost of doing business.” BLOOMBERG