Oil prices could soar as the war in the Middle East affects the Strait of Hormuz – a crucial shipping route – with the price of a barrel potentially climbing to over US$100, according to leading economists.
In this scenario, petrol prices across the country could rise by around 40 cents per litre, which would see the average Australian household spending an extra $14 per week on petrol, further adding to existing cost-of-living pressures.
However, experts have suggested that the conflict may end up being short-lived, with many markets adopting a “wait-and-see” approach. Currently, the probability of a limited war sits at around 60 percent.
If oil prices rise above US$100 per barrel, they could surpass the highs observed at the start of the Ukraine war in 2022, according to AMP Chief Economist Shane Oliver.
He also warns that Iranian-backed Houthis are moving to disrupt shipping again through the Red Sea, which could further add to transport costs.
“Higher oil prices will add to inflation, resulting in higher than otherwise interest rates. But it’s not that simple. Central banks will focus on underlying inflation and higher oil prices threaten economic growth,” said Oliver in an online post.
“Past oil price surges have played a role in US and global downturns – in the mid-1970s, the early 1980s, the early 1990s, early 2000s and even the GFC. They weren’t necessarily the driver of these recessions, but a rise in energy prices is a tax on consumer spending.”
On Monday morning (2 March), international oil benchmark Brent crude rose to above $US80 per barrel – the highest observed price in over a year – eventually settling at $US77.30 at 3pm AEDT.
“A 40 cents a litre rise in petrol prices would add about 0.8 percent to CPI inflation, but it would also impart a dampening impact on growth,” added Oliver.
“This is because it would add around $14 a week to the household petrol bill, leading to a cutback in spending elsewhere in the economy. In other words, it will act as a tax on households.
“So, for the RBA, the implications are ambiguous – a boost to inflation but a hit to growth. We are not changing our view, which sees rates on hold with a high risk of another hike.
“While higher oil prices flowing from the war could drag on Australian growth via weaker global growth, Australia is relatively well placed, as we are a net energy exporter and may benefit from higher prices for gas and coal. And our economy is less dependent on oil.”
The Strait of Hormuz, which connects the Persian Gulf and the Gulf of Oman, is a narrow channel – 33.7 kilometres wide at its narrowest point – on Iran’s southern border that facilitates the movement of around 20 percent of the world’s oil production and a quarter of liquefied natural gas every day.
It’s the only way to ship crude from the oil-rich Persian Gulf to the rest of the world.
As active strikes from the US and Israel continue against Iran, shipping through the Strait of Hormuz has effectively stopped, with insurance premiums rising by around 50 percent.
Shipping giant Maersk said on Sunday that it would halt transport through both the Strait of Hormuz and the Suez Canal, bordering Egypt, for safety reasons, instead rerouting ships around the Cape of Good Hope, which will add thousands of kilometres to cargo journeys.
Australian motorists have been urged not to panic, as it will be at least a week before fuel prices are affected.
“In the first instance, whatever happens overseas takes about 7-10 days to flow on here at home,” said NRMA spokesperson Peter Khoury.
“So we should not see an impact at the bowser immediately, and only then if things are sustained over a period of time, and we don’t see that jump stabilise and prices come back again.”
Khoury warned oil companies not to prematurely hit customers with higher costs, saying this was not an excuse for them to “jack up prices” and charge Australians more than they should pay.
”We will be watching that closely,” he added.
Despite Khoury’s pleas, panic buying has ensued across the country, with petrol station queues of up to a kilometre-long observed in Melbourne.
