Taking the right economic lessons from the fuel crisis

28 April 2026 | Danielle Wood

The fallout from the conflict in the Middle East has left Australians feeling more anxious about the economy than they have for fifty years.

Understandably, many are now asking what we can do differently to protect us from the next major shock. The government is preparing to respond in the upcoming budget, with the Prime Minister flagging ‘resilience’ as a major theme.

The challenge for the government is separating out the policies that genuinely make our economy stronger in an uncertain world from those that would be costly follies for taxpayers and consumers.

For many, the obvious fix for uncertain supply is to support more local production. While this can sometimes make sense, it’s a proposition that needs to be tested rigorously.

It is sensible to ‘insure’ against supply shocks for essential products with vulnerable supply chains like fuel. But that doesn’t have to mean local production – stockpiling, diversifying or making cooperative agreements with our trading partners are often more cost-effective ways of hedging against risk.

Before the crisis, Australia mandated that importers hold at least 27 days of fuel onshore and supported two local refineries to remain open.

A higher level of insurance would have come with a higher cost. For example, the International Energy Agency sets a standard of 90 days’ worth of net fuel imports. The government estimates the extra storage and fuel to reach this level would cost around $20 billion over four years, or around $230 per Australian adult per year. Maintaining additional local production capacity would have had a big price tag too.

Whether or not this would have been a worthwhile insurance policy given the risk and costs can be debated. But the unavoidable fact is that insurance is costly. This is why we should not sign on to these policies lightly.

We should also be careful not to extend the argument for ‘insurance’ well beyond essential industries. We are already seeing old-fashioned industry assistance arguments for bailouts of copper and aluminium smelters being dressed up in shiny supply chain security and economic sovereignty wrappers.

Our history shows that propping up unprofitable industries is costly for the budget and the economy. Indeed, scattergun industry policy reduces our resilience.

Last year, the Productivity Commission outlined a series of guardrails for government supports to underwrite supply chain security. Before offering support to a sector, the government should assess the likelihood of a disruption and ‘how bad’ it would be. They should weigh up the costs and benefits of a range of policy options – letting companies manage their own supply chain risks, stockpiling, partnering with friendly countries, or supporting domestic production.

This type of discipline ensures that industry support focuses on the most important supply chain risks, where the insurance premium is worth paying.

Ultimately, as the Treasurer has pointed out, the single best thing we can do to improve our capacity to respond to shocks is to have a strong, flexible and dynamic economy. In this sense, any productivity package in the budget is also a resilience package.

There are no shortage of options for such a package. The Productivity Commission identified 15 key reform possibilities in reports sent to the government late last year.

To start with, Australian businesses are being smothered by a snarl of regulations, rules, and reporting requirements.

Regulation is not always a bad thing. It can make our country safer, healthier, and fairer. The problem is that too often, politicians and regulators have tunnel vision when deciding whether to add more regulation – they focus on squashing one risk, and rarely consider the overall social impact. And so the regulatory hairballs only grow.

The government needs to build in counterweights to this tendency. It should set a target to reduce net regulatory costs by $10 billion by 2030, through better scrutiny of regulatory proposals and targeted reviews of sectors with particularly complex, burdensome regulations.

We can also encourage businesses to invest more in our economy with sensible changes to company tax. Our corporate tax rate is among the world’s highest, limiting growth and innovation in Australian businesses.

The government should tilt the scales back. It should cut the company income tax rate for all firms, with a bigger cut for small and medium businesses. To fund some of the budget costs, it could introduce a 5% cashflow tax on all businesses. The cashflow tax puts less burden on firms that are investing heavily.

This system would result in a lower tax rate for nearly all businesses, except large firms with low investment levels. Our modelling shows it would substantially boost investment across Australia.

Cutting red tape and retooling company taxes will make it easier to make things in Australia. And – unlike industry protection or subsidies – they will boost living standards across the economy.

Let’s hope policy makers have learnt the right lesson from this crisis: that a strong, competitive economy is the ultimate source of economic resilience.