A further escalation in the Middle East conflict could affect world oil supplies, lifting fuel prices which in Australia are already near or at record highs and adding pressure to consumer budgets and inflation.
AMP chief economist Shane Oliver said it was too soon to say what would happen, as the US financial markets have not yet resumed for the week, and it is unclear how Israel will respond to Iran’s drone attack.
“If it settles down, then you continue to get global supply of oil coming out of Iran to the global economy, and we continue to see all flow through the Strait of Hormuz,” he said.
“If those things are threatened, then it becomes a much bigger issue.”
AMP’s Shane Oliver.
Iran launched a drone strike on Israel on Saturday in retaliation for the killing of senior Iranian military figures at an embassy in Syria. Israel has labelled the attack an “unprecedented escalation”, but it’s unclear how the country will respond.
Iran produces about 3 per cent of the world’s oil supply, and Oliver said disruptions to that supply would have a significant impact on prices.
The bigger issue is the Strait of Hormuz, which forms part of the journey for 20 per cent of the world’s oil supply on a daily basis, Oliver said.
Oliver said a $10 a barrel increase in oil prices roughly translated to a 10 cents-per-litre lift in petrol prices, and with those prices in Australia already near records, it would add significant pressure to household budgets.
“Obviously, it could add to inflation, which then concerns the Reserve Bank [as] yet another supply shock,” he said.
“The other aspect is that it acts as a tax on consumer spending, which of course central banks also have to allow for [if] the price goes up.”
Oliver said there was a chance the conflict does not escalate, but he acknowledged there were plenty of risks ahead for the world and the Australian economy.