Oil and Gold Downunder
Whenever there’s trouble in the world, two commodities attract people’s attention: oil and gold. Now is one of those times. How much oil and gold does Australia have? And where is it?
First, let’s look at how much oil Australia uses and how much it produces. Australia uses about 1 million barrels of oil per day and produces (i.e., pumps out of its own wells) about 350,000 barrels of oil per day. While it might seem that Australia produces about 1/3 of its daily oil requirements, the number is closer to 12 percent. Most of Australia’s domestically produced oil is produced on the Northwest Shelf, too far from refineries on the East coast and, even if it were transported there, the grade is not as suitable for Australian refineries as oil imported from overseas. Obviously, this leaves the nation quite vulnerable to supply disruptions.
Most countries have a strategic petroleum reserve that is designed to see them through times of trouble. Australia has about 25 days’ supply of refined diesel and petroleum in reserve, which seems low. What about crude oil, pumped and sitting in barrels, that Australia could refine into petroleum? According to the International Energy Agency, each country should ensure that it holds 90 days’ supply of oil. Australia’s reserves oscillate around that number, sometimes dipping into the 60-day range, depending on how it is counted (e.g., whether you count oil that is on the way to Australia or not). During 2020, the Australian government agreed to buy $94 million of oil at very depressed prices. It was a smart move. Due to the pandemic, oil prices had fallen to levels not seen in decades. We should note, though, that the oil that Australia purchased is stored in America. That’s a problem if a situation arose that stopped tankers reaching Australia.
Perhaps, Australia might drill for more oil if it really needs to. Given the vastness of the country, one might think there’s bound to be a Texas-style oil field somewhere. This is not the case, unfortunately. According to Geoscience Australia, Australia’s proved plus probable reserves amount to about 2 billion barrels. A barrel of oil contains 159 litres (35 imperial gallons and 42 American gallons).
If Australia had to rely completely on its own oil and used 1 million barrels per day, Australia would run out of oil in about 2,000 days.
Much of the oil that Australia currently produces comes from fields offshore of North-West Australia. There are other types of oil that might prove to be significant in future. One of these is called shale oil. And there are significant deposits in Queensland. Producing shale oil requires different techniques and technology because the organic matter contained in shale rocks must be extracted and dissolved into oil and gas. It requires about 1 tonne of shale to produce a barrel of oil (given current technology). Australia has an estimated 23 billion barrels of recoverable (again, given current technology) shale oil (about 12 times the amount of proven “traditional” supplies). There’s potential there, but it would take time. If there was a serious global conflict, fuel rationing would likely be implemented within days.
Let’s turn our attention to gold. During times of geopolitical upheaval or domestic strife like localised wars or inflation, fiat currencies can lose their value. To manage this risk, people turn to gold (and silver). Central banks hold gold because of its inverse relationship to the US dollar and, more importantly, the complete absence of counterparty risk. That is, if you have 1 ounce of gold in your possession, you do not need to rely on anyone else to make good on some part of a bargain, transaction, or deal. If you hold government bonds, for example, there is a risk that the obligation the bond represents will not be honoured. Some people still think that the central banks, including the Reserve Bank, hold enough gold to back or guarantee all the paper money that is on issue. Of course, the gold standard has long ago been abandoned. How much gold does the Reserve Bank hold?
The RBA holds about 80 tonnes (about 3 million ounces) of gold. The total value is approximately $11 billion. This compares with over 8,000 tonnes held by the United States and 3,000 tonnes held by Germany. Now, if you held gold to hedge against the risk we mentioned above, you’d like to be able to get your hands on it in times of trouble. At the same time, you also want it to be secure. If you put it in a vault in Switzerland, it would probably be safe. When the trouble passes, that part of your wealth will be intact even if everything else has been destroyed. On the other hand, if you can’t get to Switzerland, you can’t get your gold, which you might need if no-one is accepting paper money. There’s something of a trade-off involved. So, where is the Reserve Bank’s gold? You might guess in a vault in Sydney or in a secret bunker underneath the Blue Mountains. In fact, the Reserve Bank’s gold is stored in London at the Bank of England (BoE). RBA staff run audits on it every so often to make sure it’s all still there.
How much gold could Australia get its hands on if the gold at the BoE was inaccessible? Australia has proven and probable gold reserves of approximately 4,000 tonnes. It could be as high as 9,000 tonnes. This means Australia is sitting on the world’s largest gold reserves. Total reserves are estimated at about 60,000 tonnes. Russia and South Africa are the other big producers. Australia produces about 300 tonnes each year. That’s a 30-year production window unless there are new discoveries. If trouble did arise, Australia’s gold situation is probably better than its oil situation. Looking at the numbers, both the oil reserves and the gold reserves, and where both reserves are stored, it does not seem like anyone is expecting major trouble anytime soon.
Note: For comparison, Germany holds 1,000 tonnes of gold in Germany at the Bundesbank (Frankfurt am Maine), 1,500 tonnes is stored at the Federal Reserve in New York, 500 tonnes is stored with the Bank of England in London, and 500 tonnes with the Banque de France, in Paris.
Discussion Question
How much fiat currency is on issue in Australia? How does this compare to the Reserve Bank’s gold reserves? Should gold and oil reserves be increased? Where is the best place to store the reserves?