I have a piece in the AFR this morning (sub required) “Good oil refined out of existence’, dealing with the reasons for the absence of major investment outside of mining. The original piece was considerably shortened. It is reproduced below with the parts edited out reinserted in italics.
Caltex has seen its share price value outperform that of similar stocks in recent weeks. Usually it is a promising new investment that drives a firm’s improved stock value but in the Caltex case it is disinvestment that has prompted the share price to rise. This involves a contemplated closure of the firm’s Brisbane and Sydney oil refineries, first foreshadowed in December 2011 and followed by an announcement last month.
The Caltex refineries are old but have been continually modernised. Their inefficiency in producing petroleum products relative to imports is due to economies of scale. Compared with the 500,000- 1.5 million barrels per day (bpd) of modern refineries, Australia’s seven refineries have 80,000-140,000 bpd capacity. Mobil closed its Adelaide refinery in 2003 and Shell will do the same for its Sydney site.
The news begs the question, “Why are we not replacing rather than retiring petroleum refineries?” Clearly, the answer is that it is cheaper to import than refine in Australia. It may be said that this is because of lower wages costs overseas. Federal minister Bill Shorten’s story is that, “we’re never going to be as cheap as Burkina Faso for labour”. But we seem to be more expensive than the US and Singapore, where many of the largest plants are and where, as in Australia, oil refineries need to be export-oriented.
Although Australian earnings may be comparable with those in Singapore and the US, productivity is considerably less.
This is because Fair Work Australia and other embedded labour market regulations deny Australian management the flexibility that is essential to efficient operations. Unions are able to hold to ransom firms having major sunk investments. In Australia, they are demonstrating their willingness and ability to operate destructively in the Queensland coal industry causing even BHP to reconsider its new investment strategy. The Queensland coal unions have demonstrated that they will pull out all the stops to increase the unionised workforce including preventing more flexible (but higher earning) non-unionised contractors from working.
In this respect, the death knell for Shell’s Sydney refinery was sounded when the unions offered to work with Shell “to establish a joint Efficiency and Innovation Improvement Working Group” and to “establish a major Scenario-Base Planning Project”. Firms see such assistance offered by unions as code for seizures of management control. As a result, firms can contemplate only those capital intensive investments where resource wealth offers overwhelming cost advantages.
Union controls would also extend to the transport of petroleum products. Mr Albanese’s attempt to use accelerated depreciation to subsidise Australian flagged shipping with one hand, is decidedly offset by his using the other hand to force more cargo onto those ships. Penalty rates, overstaffing and an ability to pull on “protected” disputes at short notice impose risks on Australian-flagging ocean vessels that far exceed any benefits from capital subsidies.
But even in the absence of labour regulations that provide over-fertile ground for union militancy, Australia has other deficiencies in the way of new petroleum refineries.
The first concrete proposal would incite spates of state and federal inquiries into environmental impacts, which would doubtless find some parrots, worms or “unique ecological communities” that would be imperilled. These would be buttressed by further inquiries using heritage, Aboriginal and other development-arresting regulations. And, of course, there would be additional costs in Australia as a result of our government’s Herculean efforts, unique outside of Europe, to save the world with a carbon tax.
The extra costs and inflexibilities would not stop there. Once built, a facility would doubtless be deemed, like most other oil facilities, to have some monopolistic characteristics that would justify the Australian Competition and Consumer Commission setting “fair” arm’s length prices that the facility might charge other firms for its outputs.
The impediments to new investment in Australia have contributed to a massive rise shift in the pattern of investment where resource riches can overcome the hurdles that have been erected. In real terms, mining has shown a tenfold rise in capital spending, over the past 25 years, manufacturing a mere 10 per cent, and other industries have doubled.
Instead of removing the impediments to productivity-enhancing investment, the political reaction is to add taxes to the sector with proven attractiveness. This will not be a diversion of investment to areas other than mining but will instead result in a fall in total investment and therefore living standards.
Additionally you have shit like this
http://www.theaustralian.com.au/national-affairs/labor-in-hot-water-over-rebate/story-fn59niix-1226284510164
THE Gillard government is under fire after winding up a solar hot water rebate scheme yesterday with only half an hour’s notice.
RodClarke
29 Feb 12 at 7:08 am
I worked at a Styrene plant in Melbourne, it closed because all the reasons above plus one that isn’t mentioned. The EPA and environment laws and regulations make it incredibly difficult and expensive to build, extend or do almost anything in the chemical and petrochemical industries. The yanks are finding out how anti business their EPA is, ours is no better.
Stephen Williams
29 Feb 12 at 7:17 am
A few years ago, the Terrorgraph had a headline:
TAXED OUT OF BUSINESS
All right (correct) thinking people ought to use this as ammunition in electoral campaigns.
.
29 Feb 12 at 8:19 am
I think you would find that with operating costs of a large refinery labour rates is not a big issue. The issues are cost of construction and cost of electricity. With the carbon tax coming in along with the current labour conditions due to FWA you would have to have rocks in your head to build a new mega refinery.
kelly liddle
29 Feb 12 at 8:26 am
I find it extraordinary there is no mention of the $A and its future direction regarding this issue.
Only myths of labour militancy.
One look at the latest MYEFO would show higher taxes are another myth.
Most analysts who examine Caltex say the major problem is the lack of scale. This would only be overcome by large scale investment.
Given where the $A is and is likely to go and given that margins for the refinery are miniscule it would take a brave man to invest in Australia rather than take advantage of much larger refineries to the North.
On your Marx
29 Feb 12 at 9:16 am
The point you missed was that indigenous Australian all production has been is rapid decline over the past decade or so and any local production has been on the other side of the country to most of the refineries. The business case for a large new refinery in Australia is weak, not considering regulatory impediments not encountered in India and China, countries where most new refinery capacity is being built. One large new refinery could easily cater for all of Australian refined products demand. Feedstock oil would need to be shipped from Asia or the middle east, bypassing established refineries enroute to transport a relatively lower value unrefined product to Australia, to be refined, then the refined product is transported back to Asia, Europe and North America. Logistically this makes little sense as a better business case for refining places refineries near oil sources or near large markets with ports.
Antipodean
29 Feb 12 at 9:37 am
Bullsh*t, marx. Go talk to the Sings. They built those big refineries on the Johore side with the intent of taking the Australian market. Why? Because careful study of the industry here showed that a combination of enviroloons, NIMBY and BANANA thinking, and union capture of business processes meant that Australia’s WWII-era refineries (big in their day) would not be replaced.
The Sings have only one resource – what’s between their ears.
They studied Australia and worked this out 25 years ago. Now, Australia is dependent for on processed product on Singapore.
I have watched as a toxic stew of greens and short term union militancy and their quest for control of capital intensive businesses has reduced or even destroyed industry after industry in this country. Shipbuilding, steelmaking, smelting, our merchant marine, the chemical industry, and on it goes.
This is exactly what wrecked British industry 1920-1960.
Now look at them. Bankrupt, with the remaining wealthy union elite having ruined the country’s economy. The stupid b*stards replaced the working class with an enslaved welfare class.
But that’s what socialists DO, it’s a feature, not a bug.
Mk50 of Brisbane
29 Feb 12 at 9:40 am
Marx the AUD is not that high and seems pretty stable look at the following graph. To compare to other relevant currencies put aud/cny and aud/thb in the get basic charts.
kelly liddle
29 Feb 12 at 9:42 am
Hi Antipodean!
Mk50 of Brisbane
29 Feb 12 at 9:42 am
Only in your fairy stories could it be classed as a myth. The new Fair Work Australia system has changed things back to the pre Hawke-Keating playing field, as most observers (of any note) have already said. This impacts on all industries, not just petroleum refining.
The dollar floats – get used to it.
blogstrop
29 Feb 12 at 9:42 am
Also, Marx, if the high AUD is to blame, how come we were able to establish and profitably run our first wave of industry 1900-1920 when the Australian pound was at parity with sterling?
Mk50 of Brisbane
29 Feb 12 at 9:43 am
amazing. Homer trolls with rubbish about exchange rates being the sole determinant of Australian competitiveness and people fall for it.
Is Sussex St still supporting your aged pension and supermarket wage with weekend yum cha, Homey?
jtfsoon
29 Feb 12 at 9:44 am
I’m in agreement with the article but I wonder how much easier it might be for industry if our population was double. That would enable a decent opportunity for economies of scale before the leap to exports is required. Also would dilute the effect of the mining boom to the extent it might be “artificially” inflating the dollar.
Lack of population shouldn’t be seen as an excuse however against desperately required reforms. I’m just arguing perhaps we should be a bit more pro population growth than we are.
kingsley
29 Feb 12 at 9:54 am
Roll on Homer, it’s the Liberal party’s fault that American incomes and output haven’t recovered yet from the GFC?
.
29 Feb 12 at 9:58 am
kingsley
Population is not a big issue Australia uses about 1 million barrels per day so could fit 2 large 500 000 bpd refineries. Should also be noted the 500 000 to 1.3 million barrels per day is a bit misleading as there are only 8 large refineries in the world over 500 000 barrels per day.
kelly liddle
29 Feb 12 at 10:35 am
Homer, you useless “protoplasm” , the $A’s rise also has the effect of allowing raw material prices to be relatively cheaper.
A strong $A causes some problems, but it’s not the entire story, you fucking moron.
Add, re-regulated labor markets along with da carbon tax to a higher dollar and you shouldn’t be surprised multinationals are closing.
Get back to aisle 7 and fill the toilet paper rack, you deceitful loon.
JC
29 Feb 12 at 11:01 am
They are here, you dishonest deadshit. They aren’t in Asia nor parts of the US.
Homer, we should introduce the rack as we’d make sure you’d spend most of your (non-supermarket) life racked up with the village kids throwing rotten tomatoes are you.
JC
29 Feb 12 at 11:04 am
Once upon a time oil refineries would have been regarded as strategic necessities, but now that the enemy is within, this view has become outdated….
Ian Macmillan
29 Feb 12 at 1:00 pm
Regulation is the other half of the equation that is killing Europe. Their labour markets are killed by legislation that denies their young people a future.
In the US, industry is fleeing the enviro-madness of California for states that are more pro-business such as Texas, South Carolina and Alabama.
H B Bear
29 Feb 12 at 2:33 pm