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Treasury has warned the Australian economy could be hit by an inflation spike and slower growth through the second half of the year as America’s war against Iran, Houthi attacks in the Red Sea, and Ukraine’s assault on Russian oil refineries upend the global petroleum market.
Amid forecasts from the chief economist of the nation’s biggest bank that the “clock was ticking” on oil spiking towards $US150 a barrel, Treasury is increasingly worried of a price crunch as nations run down their oil reserves, and supplies out of the Middle East and Russia dry up.
Brent crude eased to $US85 on Monday after hitting $US100 a barrel late last week on concerns the renewal of hostilities between the United States and Iran will leave oil refiners struggling to get adequate supplies in coming months.
Retail prices have now climbed to their highest level since early June. Over the past week, the national average price for unleaded rose by 9.5¢ to 182.3¢ a litre. Retail prices lifted by 8.9¢ in Sydney to 178.7¢ a litre, while they jumped by 10.1¢ in Melbourne to 181.7¢ a litre.
In formal advice to Treasurer Jim Chalmers, his department – which in the May budget released worst-case modelling of what would occur if oil prices reached $US200 a barrel – warned a series of factors meant the cost of oil was likely to stay elevated, hurting the domestic economy.
At the start of the war in March, members of the International Energy Authority committed to release 400 million barrels of their strategic reserves. About 290 million barrels of that reserve has been drawn down, leaving little to boost global supplies.
The move by Houthi rebels to target oil movements through the Red Sea has added to global price pressures. Although oil can still be moved out of Saudi Arabia through the Suez Canal, it adds time and cost to shipping expenses.
A new and unexpected development has been the success of Ukraine in using drones to attack Russian oil refineries. A strike last week on a Siberian refinery, almost 2000 kilometres from Ukraine, and a separate facility in the Caspian Sea caused extensive damage.
The attacks have not only forced Russia, one of the world’s largest oil producers, to impose restrictions on domestic use. Exports of diesel have now been banned, depleting global supply.
Treasury warned that “upside risks to oil prices” would build if the current state of affairs did not change.
Chalmers said the increase in global prices caused by the ongoing turmoil in the Middle East could have a detrimental impact on the global and domestic economy.
“The recent escalation of tensions in the Middle East poses a substantial threat to global inflation. There is still so much uncertainty about this war and its ongoing costs and consequences,” he said.
“Like the rest of the world, we are monitoring day-to-day developments very closely because so much hinges on a proper ceasefire and the permanent reopening of the Strait of Hormuz.
“From an economic point of view, a proper and permanent end to the war can’t come soon enough.”
Commonwealth Bank chief economist Luke Yeaman said markets believed just a few weeks ago there was a good chance of a global over-supply of oil that would bring prices down to between $US60 and $US70 a barrel.
But he said the fresh hostilities, on top of the Houthi attacks, the war in Russia and the rundown in global reserves meant there was a real chance oil could hit up to $US150 a barrel within eight to 10 weeks.
“The clock is ticking,” he told this masthead.
Yeaman said a surge in oil prices would force up domestic inflation, which by itself would likely prompt an increase in official interest rates by the Reserve Bank. But the bank could then find itself cutting rates to deal with a slowing economy.
“You could see a stagflation impulse, with higher inflation in the short term, but then growth comes down below potential,” he said.
Prime Minister Anthony Albanese will on Tuesday announce $4 million in federal funding for a pre-feasibility study into an oil refinery plant in Western Australia to be built by energy and fertiliser firm Perdaman. The nation has just two refineries – in Queensland and Victoria – with no new ones established since the 1960s.
“The longer war in the Middle East goes on, the greater the impact on Australia will be, and my government will continue to do everything we can to shield Australia from the worst effects – and set us up for the future,” he said.
While petrol prices are poised to climb, the electricity market is providing some reason for optimism as renewable energy and batteries decouple Australia’s power prices from the volatile global energy market.
Coal-fired power fell to its lowest point on record in the second quarter of the year, and gas hit a 20-year low, as renewable energy generation and in particular battery output grew, according to the latest report by the Australian Energy Market Regulator.
As a result, the past quarter’s wholesale price, which is the cost for retailers to buy electricity, was down 47 per cent compared to the same period last year.
A big shift in the electricity market during past year is the rise of batteries, including grid-scale and household installations, which has boomed under the Albanese government’s rebate scheme.
Batteries store cheap and abundant solar energy that floods the grid during the day to discharge it after sunset, and the increased volume of battery storage in the grid has reduced the cost of the afternoon peak, which typically occurs from about 6pm when solar output recedes and electricity demand spikes as millions of people start arriving home to turn on lights and appliances.
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