Treasury warns oil market is more vulnerable with depleted reserves, Houthi attacks and Ukraine drone strikes. Fuel excise decision looms as inflation data due Wednesday, RBA hike in view.
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Treasury has warned Treasurer Jim Chalmers that the economic risks from the Middle East conflict are growing, with the world's ability to absorb oil-supply shocks weakened by depleted reserves and widening disruptions. The warning comes as the federal government weighs whether to extend the fuel excise discount beyond Sunday, when the current 16-cents-per-litre cut expires.
Oil prices have climbed since the unraveling of a US-Iran memorandum of understanding, pushing diesel prices in Australia well above prewar levels across most states. Petrol is cheaper than before the war in Melbourne, Sydney and Brisbane but higher elsewhere, according to data cited by the Treasury.
In a briefing seen by the ABC, Treasury told Chalmers the oil market is now more vulnerable than during the conflict's initial phase. "During the initial phase of the conflict, the energy price shock, although significant, was contained … [including by] re-routing of exports, a drawdown in oil inventories, and some demand destruction," the briefing notes stated. Those buffers are largely gone, the department said.
Treasury pointed to three specific pressures: Houthi militia attacks in the Red Sea, which have disrupted a key alternative to the Strait of Hormuz; Ukrainian drone strikes on Russian oil refineries, which led to a ban on Russian diesel exports; and the broader spread of fighting. "The oil market is now more vulnerable … These factors mean that crude oil prices are likely to remain elevated in the near-term. Upside risks to oil prices will build if the status quo persists … price pressures may intensify over coming months," the note said.
A US ground operation in the Middle East would represent a major escalation and add to the risks, Treasury warned. The May budget included a scenario in which oil peaks at $200 a barrel in September, roughly double recent levels, driving headline inflation to about 7.25 percent.
The timing is delicate for Canberra. The Australian Bureau of Statistics releases monthly inflation figures Wednesday, the last print before the Reserve Bank board meets August 10-11. Economists regard a rate hike as a live possibility. Chalmers has argued that much of the recent uptick in economic activity comes from private-sector investment in data centres, not government spending, and that the war poses "a substantial threat to inflation."
Prime Minister Anthony Albanese and Chalmers have signaled the fuel excise discount will not last forever but have not ruled out another extension. "From an economic point of view, a proper and permanent end to the war can't come soon enough," Chalmers said. "The longer this drags out, the more serious the consequences for inflation and growth here and around the world."
Albanese on Tuesday will appear alongside Western Australian Premier Roger Cook to announce a $4 million government feasibility study for a new oil refinery in Karratha. "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," he said in a statement.
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