The fuel crisis that could break the ASX
Australia’s fuel crisis is closer to the edge than most people realise – and what happens next could reshape inflation, interest rates, and the ASX.
Right. Quick question. How much fuel do you think Australia has in reserve at any moment? Years’ worth, six months’ worth, 90 days’ worth. As a member of the International Energy Agency, we are supposed to keep 90 days’ worth. How much have we got? 38 days worth of petrol, 29 days worth of diesel, 30 days of jet fuel. And that’s on a good week, counting the ships that haven’t docked yet. We are bar none the worst prepared nation for a fuel crisis. And I’m going to tell you what it means for the economy and for the stock market.
In 2002, Australia held 310 days of fuel in reserve. These days, we’re holding somewhere between 38 and 58, depending on how charitable you want to be and who’s doing the counting. In 2005, we had eight operating refineries. We’ve now got two. One in Brisbane, one in Geelong, which caught fire the other day. And that accounts for about 20% of our liquid fuel requirements, with the other 80% coming from Singapore, Malaysia, Taiwan, and Korea. And if one of the refineries, say in Singapore, goes offline, and can’t import enough oil to supply us, we can’t make our own. No wonder the politicians have been out there waving the flag, shaking hands, and promoting a Singapore deal. We just don’t have the refining capacity. We shut it all down years ago because it was cheaper to let Asia do it.
And here’s the bit that gets me. We are the only one of 31 members of the International Energy Agency that has never held the required 90 days of fuel reserves. The average member carries 130 days. And we’ve been failing this benchmark since 2012. Three Liberal governments, two Labor governments. Nobody’s fixed it.
Australia’s fuel crisis in context
You’ve been watching the news. The Strait of Hormuz blocked. Oil prices over $100. Israel strikes on Lebanon. US strikes on Iran. A peace deal that no one will sign. A ceasefire that may or may not hold. Insurers pulling insurance from carriers and ships trying to run the Strait of Hormuz being turned back – not by the Iranians, but now by the United States.
Six weeks ago, we walked into a situation that every defence white paper has been warning about for years and every government has politely ignored. Since then, we’ve halved the fuel excise. We’ve released 762 million litres of fuel and diesel. And we’ve lowered the fuel standard so we can feed your $200,000 four-wheel drive a sulphur-laced fuel that it’s not going to send you a thank you card about. Meanwhile, the National Farmers Federation has told us that food prices could rise by 50% if the fuel supply doesn’t ease up. Think about that when you’re pushing your trolley through Woolworths.
And the 38 days doesn’t include fuel sitting in Australia. It includes fuel in tankers that are in mid-voyage, that are in an area of water that the insurers now consider a war zone – because essentially it is. And if we needed to top up our reserves, we’d have to get some fuel into Singapore, get it refined. It’s another 30 or 40 days if we don’t act now. So we’re relying on reserves that are not here. They’re more relying on fingers crossed.
What this means for inflation and interest rates
So what does all this mean and does it matter? Well, the truth of the matter is we’re six weeks in. The oil price rise so far is cosmetic. It’s not embedded. It’s all about duration.
Now, the price at the pump has almost immediately gone up. You think it’s the retailers, but the retailers’ margins are really very fine. Most petrol in this country is set by the big resellers. Think Costco and Woolworths and Coles – and they are responding to their input prices which moved extremely quickly. Truth of the matter is no one’s really rorting you here.
And if you saw petrol running out in petrol stations, it wasn’t because there wasn’t enough oil in the world. It certainly wasn’t because there wasn’t enough petrol in Australia. Petrol stations running out was a toilet paper effect, not a Strait of Hormuz effect.
So we don’t really have a problem unless this carries on. And you’d have to say there’s no lasting damage unless this goes on for six months. And the lasting damage starts to come when fuel prices start feeding other prices – when they start feeding price rises in groceries, higher airfares, higher prices for manufacturers’ goods. And the worst one: when companies find that their cost base has gone up, and some ASX-listed companies have already started popping out profit warnings – the first of many, I assume, if the oil price stays up. They start trying to recover their costs by pushing prices up. And also, as prices go up, the worst thing happens: everybody wants to be paid more. And once you start getting into people getting paid more, that becomes more permanent.
And you can suddenly realise why Michelle Bullock at the RBA is hedging her bets on inflation – because it can’t get ingrained. Ingrained means people are getting paid more, prices have gone up permanently, and they’re not coming down. It’s the same as the COVID effect. We’re still paying more. That’s what Michelle’s warning about. If it goes on, it gets ingrained. If it gets ingrained, interest rates are going to go up.
3.5% of inflation numbers in Australia is fuel. But that’s not the point. That’s the little cosmetic bit that pops up – as it has done last month – if the fuel price goes up. But what happens is ultimately it starts to push all the other elements of the CPI number, and suddenly the RBA can’t get on top of it. Which is why they’ve raised rates somewhat prematurely just recently – in order to stop inflation getting away, to stop consumers spending more. They’re already getting pummelled at the pump price and with their mortgage rate. But if we start to see grocery prices going up, we’ll start to see people getting paid more. Then it’s ingrained. Then it’s got away. Then the RBA can’t get back on top of it. Then we’re going to see not two rate rises this year – which is the expectation – we’re going to see three, and we’re going to see three next year. And we will have seen a major pivot point in inflation and interest rates because the Strait of Hormuz has been blocked. That’s the worst-case scenario.
And ultimately if that happens, everybody’s talking about recession. If recession happens, we’ve got recession with higher prices and higher interest rates. The consumer stops spending. You see a whole load of ASX companies downgrading their forecasts and the stock market goes nowhere.
What it means for your super and the ASX
So for all you Australian retirees, you have to wonder. You might be thinking, “Oh, I’m going to get paid more because I’ve got cash in a deposit account and the interest rates are going up.” But it’s not about you. It’s about your super. If the economy goes into recession, I can tell you the stock market’s going nowhere. And that’s the biggest risk from all this.
So what do you do about it? Well, if you are sitting in a lot of term deposits, well done – you’re going to be earning more money. If you are mortgaged to the eyeballs, you’re going to have to rebudget. You’re going to be spending less. You’re going to go to your employer asking for a higher salary. You’re going to be contributing to the inflation problem with that demand.
But from our point of view, the main issue – if the oil price stays up at $100, if it goes to $150, which some people are suggesting it could and stays there – we’re going to see a global recession. In which case, all the cyclical companies, which include resources – 25% of our market – are going to go down. That includes all these lovely themes we’ve been looking at, things like copper. And if interest rates go up, I’m afraid, generally speaking, gold goes down. And if interest rates go up, whilst that can be seen as good for banks because it widens their net interest margin, ultimately it kills the housing market – and that’s the main driver of Australian banks, which is another 25% of our market. Loan growth will shrink to nothing.
The one thematic holding up
Through this there has been one thematic which has come back, and the one thing that we have taken advantage of is a now enduring theme – especially after a bit of a price correction – and that is big tech and AI. The AI spending is continuing. The deals are coming through. Every week there’s another huge multi-billion dollar deal investing in an AI company or an AI infrastructure build. This momentum is going to go through a recession and it’s one of the very large enduring defensive themes if the world goes into recession.
Having said that, the stock market game is not about losing less money by being in defensive stocks. The game is about don’t lose money. Full stop.
How do you go about that? Well, I would say the main takeaway at the moment is that until this oil price comes down, don’t stick your neck out. Don’t stick your neck out on a huge mortgage. Don’t stick your neck out on a big acquisition. Don’t stick your neck out betting on speculative stocks. Don’t stick your neck out on sectors like resources that have gone into overbought territory. Just don’t stick your neck out. Your term deposits are going to be looking good for a while. You’re going to pull in all your spending. Budget a bit harder. Happiness is expectations met. Just lower your expectations until you see the oil price peaking. And that means the Strait of Hormuz opening.
How long that lasts – this is the problem these days with Trump. Nobody knows. It could go wrong in one tweet. It could go wrong with one missile. It could go wrong with one sunk ship. And then again, it could suddenly go right with one tweet.
And all of this has been nothing but a fearful moment that we should have been buying. The position in our fund at the moment – which is currently running with about $123 million in it – is that we have got ourselves fully invested over this bottoming of the market. We are now running on the expectation that we’ve hit peak negativity. We know we could easily be wrong. We’ve taken a risk. You have to take a risk in order to make any money in the stock market. By the time it’s certain, it’s too late. We need an end to the war. We need the opening of the Strait of Hormuz. And if that goes wrong, we’re going to have to think again.
So if you want to follow what we’re doing, sign up for a free 14-day trial of Marcus Today. We narrate on the war and market timing there every day. And if you want a hands-off approach, let us do it for you. Go and have a look at the website, green button, invest with us. That’ll tell you about MT20. Click on the button, find out what we’re doing, follow along, and we’ll do the market timing for you. That’s me done. You have a good day. Let’s hope it’s soon all over.