Good oil refined out of existence
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. 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.
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.
In real terms, mining has shown a tenfold rise in capital spending, 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 result in a fall in total investment and therefore living standards.