Middle East Conflict Could Drive Australian Petrol Prices Towards $3 a Litre
Australians may soon face petrol prices approaching $3 a litre if the Middle East conflict intensifies and oil supply disruptions persist, according to new modelling from Westpac. This stark warning follows recent military actions, including US and Israeli strikes on targets across Iran, which resulted in the death of Supreme Leader Ayatollah Ali Khamenei, and Tehran's subsequent retaliation against US assets and regional infrastructure.
Oil Price Scenarios and Global Supply Risks
Westpac's analysis indicates that if disruptions are confined to Iranian production—accounting for approximately 4 per cent of global supply—oil prices could increase by an additional US$25 per barrel, reaching around US$100. However, the more significant threat stems from the ongoing closure of the Strait of Hormuz, a critical shipping corridor responsible for about 20 per cent of global oil trade.
Iran has effectively halted commercial traffic through the Strait of Hormuz for four consecutive days, employing drone strikes and explicit military threats to deter vessels, despite sustained US strikes targeting its naval assets. Reports indicate at least four oil tankers have been hit, and maritime data from Lloyd's List Intelligence shows seaborne traffic through this chokepoint plummeted by roughly 80 per cent on Sunday. Compounding the issue, major maritime insurers have withdrawn coverage for ships operating in the area, further discouraging passage.
In a statement on Monday, Brig Gen Ebrahim Jabbari, a senior adviser to the commander-in-chief of Iran's revolution guards, escalated the threat, declaring: 'We will attack and set ablaze any ship attempting to cross.'
Potential Economic Impacts and Inflationary Pressures
Westpac's modelling suggests that if shipping through the Strait of Hormuz is disrupted for up to a month, Brent crude oil prices could spike to US$113 per barrel. In a severe scenario where the Strait remains closed for three months or more, Brent could surge to US$185 per barrel. The bank cautioned, 'The longer and more intense the disruption, the greater the real economy cost and hit to sentiment.'
This could translate to petrol prices in Australia rising by between 25 cents and $1 per litre, depending on fluctuations in the Australian dollar and refinery margins. At the upper end of this range, fuel prices in many cities could climb towards—and potentially exceed—$3 a litre.
Higher oil prices would 'feed rapidly into headline CPI via petrol and transport costs, and indirectly via energy-intensive products such as fertilisers,' Westpac warned. The impact extends beyond the bowser, as dearer fuel increases the cost of moving goods nationwide, pushing up freight and logistics expenses that ultimately affect supermarket shelves.
Broader Economic Ripple Effects
- Farmers face elevated costs for fertiliser and diesel.
- Manufacturers incur higher expenses for energy and transport.
- Airlines pass on rising jet fuel costs through increased airfares.
Over time, these pressures ripple across groceries, retail goods, and travel, making everyday essentials more expensive for households. If oil were to rise to US$100 a barrel and remain there, modelling suggests Australian interest rates could settle around 25 basis points higher over the longer term than otherwise expected.
Central Bank Vigilance and Inflation Concerns
Reserve Bank Governor Michelle Bullock has highlighted that the escalating conflict in the Middle East could complicate the path for interest rates, noting the central bank is closely monitoring the impact on inflation. 'Every meeting is live,' Ms Bullock said regarding the board's next meeting on March 17. 'The board will be looking at whether it needs to be moving more quickly.'
She emphasised that the bank's staff are 'very alert' to the impact on inflation expectations from the Middle East conflict. 'It's too early to say what the impact will be, events are moving rapidly and there are different ways this can play out,' Ms Bullock told the Financial Review Business Summit on Tuesday. 'A supply shock could, for example, add to inflation pressures.'
Ms Bullock added, 'At the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out. The potential implications for inflation expectations are something we are very alert to.'
Westpac economists based their analysis on the Oxford Economics Global Economic Model, a large-scale forecasting system used to assess how major global events affect economies. This model allows economists to simulate shocks, such as a sudden disruption to oil supply, and track the knock-on effects on prices, growth, inflation, interest rates, and financial markets.
