If petroleum is going to save Australian manufacturing, why are the country’s oil refineries on their knees?

Exxon Mobil Corp. recently announced the closure of its processing plant in the Melbourne suburb of Altona after more than seven decades. From a point eight years ago when the country had seven refineries, that will leave just two. Of those, one is already weighing whether to shut off its spigots. The other is staying in business thanks to a government subsidy that will amount to A$30 million ($23 million) in the first half of this year.

It’s not hard to see why this is happening. Despite its world-beating exports of coal and liquefied natural gas, Australia is seriously short of oil — and has been for most of its history, except for a blip in the 1980s when hydrocarbons from fields offshore and in the central deserts briefly brought self-sufficiency. These days, more than 80% of consumption depends on imports. Much of the local production is of light, semi-gaseous condensates that aren’t suitable for transport fuel.

In this world, it makes less sense than ever to manufacture gasoline, diesel and jet fuel at Australia’s small, antiquated refineries. As a rule of thumb, the profitability of such a plant goes up with its complexity, with each additional distillation or cracking unit giving flexibility to make the bespoke mix of products the market wants. That, in turn, is a result of size — and Altona, which can get through about 80,000 barrels a day, simply can’t compete with the large Asian and Middle Eastern plants that take in 10 times as much, or more.

Combined with a long-run decline in the cost of transport — the Baltic Exchange’s index of rates for the clean tankers that carry fuel hit a record low last November, making it cheaper than ever to ship gasoline around the world — there’s simply no reason for Australia to process foreign crude onshore.

The inevitability of this decline casts a bad light on Australia’s version of U.S. President Joe Biden’s “Build Back Better.” In contrast to the Biden administration, which has made wiping out emissions from America’s power sector a centerpiece of plans for a post-COVID-19 economic restart, the conservative government has pinned its hopes on a gas-fired recovery. It has promised to build pipelines and a new natural gas power station if the private sector opts not to, arguing the fuel is essential to the manufacturing sector.

To the extent that’s the case, it’s emblematic of how Australia’s manufacturing sector isn’t what people think. The remnants of the car industry, the most emblematic example of a factory providing high-tech, well-paid, blue-collar employment, shut down over three years ago when General Motors Co. and Toyota Motor Corp. closed their last local production lines, one of them part of the same industrial cluster as the Altona refinery.

What’s left is increasingly not the sophisticated manufacturing of the popular imagination, but basic materials transformation: metal smelting, food and beverage packaging, commodity chemicals and plastics, wood and paper pulp — and, indeed, oil refining. Those industries alone accounted for about 56% of the jobs and 65% of the sales revenue in the sector in 2019.

In contrast to more advanced manufacturing businesses, which use electricity to operate their machinery, these are indeed often dependent upon cheap fossil fuels to do their brute work of heating and breaking chemical bonds. The trouble is, most of them suffer the same problems of small scale, antiquated facilities and distance from global supply chains that have doomed refining.

Rio Tinto Group’s aluminum smelting business, one potential beneficiary of the government’s gas-led recovery proposals, has been struggling to break even for a decade. The company has tried and failed to sell it multiple times. Yara International ASA’s ammonia plant in the northwest, another major gas user, has been written down in recent years thanks to a global glut. A country that’s the world’s biggest supplier of steelmaking raw materials has just two struggling mills.

The difficult truth is that Australia is simply too small and remote from the major supply chains of North Asia, Europe and North America to have a manufacturing sector that can compete. What it is good at — and has been throughout its modern history — is getting rich providing the raw materials to power industry in the northern hemisphere countries with the labor forces and end-markets to support it.

With one of the world’s richest endowments of metals and the renewable power that would be needed to produce zero-carbon liquid fuels, Australia is well-placed to take advantage of the next commodities boom. If the government remains wedded to a declining fossil fuels industry, it won’t end up surfing this wave — it will be dumped.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies.

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