Fuel security: the hidden costs emerging in Australia's food system

Fuel excise returned to its full rate this week, adding pressure at the bowser for farmers, freight operators and households across the country. It is also a reminder of a deeper vulnerability in Australia's agrifood system: its dependence on imported fuel and other critical inputs.

The ongoing conflict in the Middle East and resulting fuel price increases highlight how heavily Australian agriculture relies on imported fuel and overseas supply chains. Diesel remains essential for on-farm operations and the transport networks that connect producers to markets. Farmers also depend on imported nitrogen-based fertilisers, with many of those supply chains exposed to the same geopolitical disruptions.

While short-term disruptions can usually be absorbed, prolonged interruptions increase production and freight costs, ultimately driving higher prices for consumers.

"As the fuel excise discount ended this week, we're already seeing fuel cost increases across the country," says Professor Owen Atkin, Director of the Agrifood Innovation Institute (AFII).

"This is exposing a vulnerability in Australia's agrifood sector that is evolving from a short-term challenge into a long-term systemic issue because of our heavy reliance on imported fuel. Unless we address the underlying problem, Australian households and farmers will continue to face increasing costs into the future."

No longer a short-term problem

When the Middle East conflict began in February, it was widely viewed as a temporary fuel supply shock. Government measures, including the fuel excise discount, helped moderate immediate impacts. As the conflict has persisted, however, it has become increasingly clear that Australia's reliance on overseas fuel markets represents a longer-term strategic risk rather than a temporary disruption.

Treasury has warned that inflation could rise and economic growth slow through the second half of 2026 as conflict in the Middle East, attacks in the Red Sea and continued disruption to oil infrastructure unsettle global petroleum markets. Since February, strategic oil reserves have been released internationally to stabilise supply, but forecasts suggest prices are likely to remain elevated.

Ongoing disruption also increases the risk that markets move beyond price volatility and into periods of actual supply disruption. Australia holds comparatively low strategic fuel reserves, leaving it particularly exposed should global supply constraints intensify.

For a country that imports most of its liquid fuel, higher global prices flow directly through to farm businesses, freight networks and household budgets.

"When diesel and fertiliser costs climb like this, farmers can absorb it for a while, but they can't sustain it indefinitely," says Professor Atkin.

"Over time, those costs flow through the supply chain and place upward pressure on food prices. The longer-term risk is even greater. If Australia does not develop a coordinated national approach to fuel and fertiliser security, we will face ongoing increases in agricultural production costs and consumer prices."

Rising fuel prices increase both production and freight costs, placing additional pressure on businesses and households alike. As the next growing season approaches, those effects are likely to become more apparent across the food system.

Basic food prices have already begun to rise. In April, Coles and Woolworths increased the price of home-brand milk by up to 12 per cent, highlighting the broader cost pressures moving through the dairy supply chain. Higher diesel prices increased freight and on-farm operating costs, while fertiliser prices also rose. Even plastic milk bottles were affected, given petrochemicals are closely linked to global energy markets.

Those pressures are already influencing decisions on the ground. Farmers in North Queensland have reported that returns at market are increasingly struggling to cover production and transport expenses, making future planting decisions more difficult.

As input and freight costs rise, producers are likely to adjust crop choices and market strategies to maintain profitability. Over time, sustained increases in production costs could influence what Australia grows, where it is sold and, ultimately, what Australian consumers pay at the checkout.

Low-carbon liquid fuels: a national opportunity

Building new refinery infrastructure, such as the proposed project in Western Australia, would maintain Australia's dependence on imported crude oil and ongoing exposure to global market volatility. It would not address the underlying vulnerability.

Australia needs a strategy that strengthens fuel security while supporting decarbonisation. Low-carbon liquid fuels (LCLFs), commonly referred to as biofuels, offer one pathway to achieve both goals.

LCLFs can be produced domestically from agricultural waste streams and dedicated feedstocks, reducing reliance on international shipping routes while providing a practical fuel option for sectors that are difficult to electrify, including heavy freight and aviation. Developing sovereign fuel production capacity would play directly to Australia's strengths in agricultural production and bio-based feedstocks.

At ANU, this is an active area of research, including efforts to develop reliable, scalable supplies of crops such as canola and other brassica oilseeds that can be grown alongside food production systems. Australia is already the world's second-largest exporter of canola, with a significant proportion processed into renewable fuels overseas. Yet domestic renewable diesel production capacity remains limited.

The technology pathways are largely understood and, in some cases, can be integrated into existing refinery infrastructure through targeted investment. Expanding that capability would strengthen both the resilience and sustainability of Australia's agrifood and energy systems.

Why scaling up isn't simple

Growing more oilseed crops is only one part of the solution. Fuel security depends on developing feedstocks, processing capacity, infrastructure and logistics together rather than scaling individual components in isolation.

Waste-based feedstocks alone are unlikely to support a large-scale domestic industry. Purpose-grown feedstocks, processing facilities and supply chains will need to be developed in parallel. In the short term, the clearest opportunity lies in expanding Australia's capacity to convert canola and other crop oils into renewable diesel and sustainable aviation fuel. Over the medium term, the challenge becomes increasing feedstock supply without compromising food production.

The individual building blocks already exist. The crops, processing pathways and market demand are largely understood. The missing piece is an integrated approach that brings agriculture, infrastructure, processing and policy together within a coherent national strategy.

This is the gap AFII is working to address. Bringing together expertise across agriculture, energy systems, transport, infrastructure and policy, ANU is well positioned to help government and industry partners understand how different transition pathways interact and what is required to make them work at a system level.

What's next

Fuel and fertiliser security will remain critical challenges long after the current crisis eases. The decisions made now will help determine what Australia grows, exports and pays for food in the decades ahead.

Building resilience will require long-term collaboration between research, industry and government to strengthen supply chains, reduce reliance on imported inputs and develop practical alternatives that support both productivity and sustainability.

AFII will continue to share updates as this work progresses.