Brent crude jumped from around $US74 a barrel to $US79 on Thursday, and global financial markets fell. US President Donald Trump had said he considered the ceasefire with Iran over and launched a series of strikes in retaliation for fresh Iranian attacks on commercial vessels.
Australian Treasurer Jim Chalmers warned that the renewed fighting would hit economic growth and add to inflation at home and abroad, as concern grew that the Strait of Hormuz could be shut again. “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,” he said. “The longer this drags out the more serious the consequences for inflation and growth here and around the world.”
Trump vowed on social media that if Iran keeps up its actions, “it will get much worse!”
What set it off
Earlier in the week Iran attacked three ships trying to transit the strait. It then said it had also attacked US bases in Kuwait and Bahrain. Those attacks are the biggest risk to the ceasefire, which rests on a Memorandum of Understanding the US and Iran signed in mid-June. The war began on February 28 and pushed oil prices towards $US120 a barrel.
The International Monetary Fund said this week that renewed Middle East conflict is the single largest risk to the global economic outlook. Continued war, it said, could “extend commodity price volatility, further threaten supply chains, raise prices and weigh on financial conditions.” The fund expects global growth to fall to 3 per cent this year and recover to 3.4 per cent in 2027. That forecast assumes the strait reopens from the middle of July and shipments are back to normal by March next year.
Economists and the pump
AMP chief economist Shane Oliver called the economic fallout “messy” and said the oil price remains the biggest threat. Most countries have run down their reserves in recent months, he noted, leaving fewer options in a long war. He argued both sides have a financial stake in ending it quickly. “Everyone is expecting a Trump TACO – Trump always chickens out. But in this case, Iran has the sauce,” he said. “I don’t think Trump wants to go back to where he was, especially ahead of the midterms. But Iran also can’t afford it.”
In Australia, unleaded petrol topped $2.50 a litre in Sydney and Melbourne in March, and diesel reached $3. Prices then fell sharply because of cuts to excise and GST and a big rise in fuel supplies. On July 1 the government halved the 32 cents per litre excise cut it brought in during April. Unleaded now averages $1.68 a litre in Melbourne and $1.66 in Sydney, close to the price a week before the war.
Oil market moves usually take a week or more to reach Australian pumps, and this one is not yet big enough to change retail prices much. National Roads and Motorists’ Association spokesman Peter Khoury said prices should hold if oil stays where it is. “If things stabilise it will have no meaningful impact on the price of the bowser,” he said. “But if all hell absolutely breaks loose then there’s every chance that further price rises will be passed on.”
Opposition defence spokesman James Paterson said Iran and the US were not back in full conflict, but not close to peace either. He described a “complicated, messy negotiation” in which the president is using his leverage to push Iran toward a settlement that keeps the strait open.
Sources
- Ceasefire breakdown a fresh economic threat: Chalmers
- Ceasefire breakdown a fresh economic threat: Chalmers
