Hi Sanjay

Thank you for this thoughtful proposition. Under present conditions, however, I do not believe it would work to Australia's advantage. India unquestionably possesses industrial capabilities that Australia needs, and there are important complementarities between the two economies. Your proposition that Australian LNG could support India while India supplies Australia with diesel, distillates and petrochemicals therefore appears, at first, to offer a mutually beneficial exchange. However, when examined under the conditions exposed by the present war involving Iran, that apparent complementarity becomes considerably more problematic economically, materially and geopolitically.

The war has exposed two problems I recently discussed in Energy Intelligence: the illusion of control and the illusion of capacity.

The illusion of control concerns the United States. The dominant role of the US dollar in international energy trade provides substantial monetary influence, but it does not provide control over the material energy system. When war constrains crude oil, refining, shipping or other essential components of that system, oil and refined products become more expensive even in US dollars, affecting Americans as well as the rest of the world, including Australia and India.

The illusion of capacity concerns Australia differently. Australia operates a heavily diesel-dependent economy but lacks sufficient domestic refining capacity to sustain that economy, making it dependent upon imported diesel and other liquid fuels. The financial consequences of that dependence are now visible. In the June quarter of 2026, Australia's imports of fuels and lubricants increased 42.5 per cent, from A$15.7 billion to A$22.3 billion, driven by higher prices for crude oil and refined petroleum products. The Australian Government also secured additional diesel shipments in response to global supply shortages. Over the same quarter, Australia's goods and services deficit widened from A$2.9 billion to A$5.1 billion, while the current-account deficit reached A$27.2 billion.

The price evidence is even more striking. Australia's import prices for petroleum and related products increased 47.1 per cent in the June quarter—the largest quarterly increase since the series began in 1983—and were 67.7 per cent higher over the year. The ABS attributed the increase to disruption of global oil supply associated with the closure of the Strait of Hormuz. The RBA similarly reported that Australian wholesale diesel prices had risen around 48 per cent since the end of February, while retail diesel prices were 51 per cent above pre-conflict levels in May.

These figures demonstrate the material consequence of Australia's illusion of capacity. Australia could still purchase diesel; indeed, it imported additional shipments. But maintaining access required Australia to spend substantially more on foreign fuel precisely when the material system was constrained. The capacity to pay for another country's output was not the same as possessing the capacity to produce it. And this does not yet account for the repercussions of higher diesel and fuel costs on inflation.

Under my argument, India is also exposed to the illusion of capacity, but in almost the opposite way. India possesses very substantial refining capacity, yet it remains heavily dependent upon imported crude oil to exercise that capacity. The present war has made India's problem simultaneously one of scarcity, access and cost.

With crude oil now trading above US$100 per barrel, India already faces a substantially more expensive principal input to its refining system. But that quoted price does not capture the entire problem. If established crude supplies or shipping routes are disrupted, India must secure replacement crude from alternative producers that remain physically and commercially accessible. Oil may be available from Russia, Brazil or other producers, for example, but alternative sourcing can involve greater distances, different routes and additional freight, insurance, financing and logistical costs. The effective cost of delivering replacement crude to an Indian refinery can therefore be substantially higher than the international benchmark price.

India incurs those costs before refining has even begun. It must then transform the crude into diesel and other refined products. With the Indian crude basket recently around US$116 per barrel, and Asian diesel benchmarks already trading around US$170–190 per barrel, India cannot plausibly supply Australia with refined diesel at anything close to the crude price itself. Any diesel subsequently exported to Australia must recover the cost of acquiring and delivering crude, the cost of refining it, and the opportunity cost of exporting the resulting diesel rather than consuming it domestically or selling it into another market. Under present conditions, Asian diesel prices in the broad US$170–190 per barrel range illustrate the substantially higher value of the refined product relative to the crude input, before Australia-specific freight and contractual terms are considered.

At current exchange rates, a diesel price of approximately US$170–190 per barrel would translate into roughly A$238–266 per barrel, or A$1.50–1.67 per litre, for Australia before freight, insurance, domestic distribution and taxation are added. This is unlikely to constitute cheap diesel for Australia. And this calculation concerns diesel alone. It does not include the cost of the petrochemicals that form part of the proposed exchange. Those products would introduce their own feedstock, processing, energy, transport and opportunity costs.

Yet India cannot simply reduce the price to make the proposition more attractive to Australia without affecting its own return on the transaction. India must recover the cost of acquiring and transporting crude, refining it into diesel and foregoing the value available from domestic consumption or alternative export markets. The lower the price required to make Indian diesel attractive to Australia, the greater the pressure on India's return; the higher the price required to protect India's return, the less attractive the diesel becomes to Australia.

India's refining capacity is therefore unquestionably real, but the crude required to exercise that capacity may be scarce, distant and increasingly expensive to obtain. Having refining capacity does not guarantee affordable access to the material input required to use it. This creates a more fundamental problem with the proposed LNG-for-diesel exchange. Australia possesses the material capacity to produce and export LNG, while India possesses substantial refining and petrochemical capacity but depends upon imported crude to exercise it. Supplying Australian LNG to India could therefore strengthen India's capacity to act under constraint by giving it access to an energy resource it requires. In return, however, Australia would not acquire India's refining capacity. It would purchase the output of that capacity and would remain dependent upon India's ability and willingness to obtain crude, refine it and allocate diesel for export to Australia. The exchange could therefore strengthen India's material capacity without materially increasing Australia's own capacity to act under constraint. More fundamentally, importing Indian petrochemicals would reproduce the same capacity problem: Australia would gain access to the output of India's industrial capacity without acquiring the capacity to produce those products itself.

India's membership of BRICS then becomes particularly relevant. India participates alongside major energy producers and markets including Russia, Iran, Saudi Arabia, the UAE, China and Brazil. These relationships do not eliminate India's dependence upon imported crude, nor can BRICS eliminate physical scarcity, distance or transportation costs. They may, however, provide India with additional suppliers, trading relationships and potentially different currencies, settlement arrangements, financing mechanisms or commercial terms through which it can attempt to secure the crude required to exercise its refining capacity.

That also creates an important asymmetry with Australia. Australia is not a member of BRICS. Any advantage India obtains in acquiring crude through BRICS relationships—including alternative suppliers or settlement arrangements—does not automatically extend to Australia's subsequent purchase of Indian diesel. Australia and India could establish a bilateral arrangement involving Australian dollars, Indian rupees or another settlement mechanism, but such an arrangement would have to be negotiated and justified by the value of the trade between them. Otherwise, the transaction remains exposed to the prevailing international pricing and settlement system.

This matters because India's ability to improve the terms under which it obtains crude does not necessarily mean that Australia obtains India's refined diesel on equally advantageous terms. India would have to decide whether selling that diesel to Australia provides greater value than retaining it domestically or selling it elsewhere.

In that context, the fundamental question is not whether Australia has LNG or India has refineries. Both propositions are true. The question is whether, under material constraint, the proposed exchange increases each country's capacity to act. For India, access to Australian LNG potentially does. For Australia, access to Indian diesel and petrochemicals does not create the refining and industrial capacity it lacks.