Call to stockpile oil for insurance

The world's peak energy security body is urging Australia to build a massive system of underground oil tanks to insulate itself against the increasing risks of a disruption to supplies.

Amid growing fears terrorist activity led by Islamic State could threaten world oil production, the International Energy Agency is understood to be growing increasingly frustrated with Australia's failure to establish strategic oil reserves.

The reserves, consisting of a series of huge tanks and pipes, are a requirement of IEA member countries that are net oil importers such as Australia.

However, the Federal Government has baulked at meeting the obligation over concerns the estimated cost of $6.8 billion would blow out a Budget bottom line already under stress.

It comes as Australia's stocks of oil reserves have plummeted in recent years to 38 million barrels - equivalent to about 59 days of net oil imports.

This is far short of the IEA's requirement for net oil importers to hold 90 days worth - or about 58 million barrels.

In a report on the compliance of member countries with the policy, the IEA said Australia's dependence on oil imports was growing but its capacity to boost production or switch to other fuels was limited.

The Grattan Institute's Tony Wood said the policy was a form of insurance and Australia's refusal to comply with it could leave the country vulnerable in the event of an oil crisis.

He said almost all of Australia's oil reserves were held commercially but were falling as local refineries closed because of pressure from bigger foreign refineries.

Mr Wood said Australia needed to fall into line or renegotiate its position and contribute to a regional system with regional neighbours.

"We can't just continue to be in breach of an obligation under an international agreement to which we are a signatory," he said.

Industry Minister Ian Macfarlane said he was "considering the benefits and potential costs to consumers of such stocks including though its Energy White Paper process".

Asked whether he was comfortable with Australia's level of risk in the event of an oil crisis, Mr Macfarlane said the nation enjoyed "reliable sources from a wide range of countries".