oil prices could derail economy, Treasury warns
The Treasury has warned that Australia’s economy could be hit by rising inflation and slower growth in the second half of the year as America’s war against Iran, Houthi attacks in the Red Sea and Ukraine’s attack on Russian oil refineries disrupt the global oil market.
Amid predictions by the chief economist of the country’s largest bank that “the clock is ticking” on oil’s rise towards US$150 a barrel, the Treasury is increasingly concerned that prices will contract as countries’ oil reserves dwindle and supplies from the Middle East and Russia run out.
Brent crude oil fell to US$85 a barrel on Monday after reaching US$100 a barrel late last week on concerns that a reignition of hostilities between the US and Iran would leave oil refineries struggling to maintain adequate supply in coming months.
Retail prices rose to their highest level since early June. Last week, the national average price of unleaded fuel rose 9.5 cents per liter to 182.3 cents. Retail prices rose 8.9 cents to 178.7 cents per liter in Sydney, while they rose 10.1 cents to 181.7 cents per liter in Melbourne.
His department, which gave formal advice to Chancellor of the Exchequer Jim Chalmers and published worst-case modeling of what would happen if oil prices reached $200 a barrel in the May budget, warned of a number of factors that meant the cost of oil was likely to remain high and hurt the domestic economy.
At the start of the war in March, members of the International Energy Authority had committed to releasing 400 million barrels of their strategic reserves. Approximately 290 million barrels of this reserve have been exhausted, leaving little left to increase global supply.
The Houthi rebels’ move to target oil movements in the Red Sea increased global price pressures. While oil can still be transported out of Saudi Arabia via the Suez Canal, this adds time and cost to transportation costs.
A new and unexpected development was Ukraine’s success in using drones to attack Russian oil refineries. Last week’s strike at a Siberian refinery, about 2,000 kilometers from Ukraine, and a separate facility in the Caspian Sea caused major damage.
The attacks not only forced Russia, one of the world’s largest oil producers, to impose restrictions on domestic use. Diesel exports are now banned and global supply has been depleted.
The Treasury warned that if the current situation does not change, “upside risks to oil prices” will increase.
Chalmers said that the increase in global prices due to the ongoing turmoil in the Middle East could negatively affect the global and domestic economy.
“Recently rising tensions in the Middle East pose a serious threat to global inflation. There is still much uncertainty about this war and its ongoing costs and consequences,” he said.
“Like the rest of the world, we are following daily developments very closely because much depends on a suitable ceasefire and the permanent reopening of the Strait of Hormuz.
“From an economic perspective, a proper and permanent end to the war cannot come soon enough.”
Luke Yeaman, chief economist at the Commonwealth Bank, said just a few weeks ago markets believed there was a good chance global oil supplies would be high and prices would fall to between $60 and $70 a barrel.
But Houthi attacks, as well as new hostilities, the war in Russia and a decline in global reserves, mean there is a real possibility that oil will reach US$150 a barrel within eight to 10 weeks, he said.
“The clock is ticking,” he said to this imprint.
Yeaman said the rise in oil prices would increase domestic inflation, which would likely lead to an increase in the Federal Reserve’s official interest rates. But the bank may later find itself cutting interest rates to cope with the slowing economy.
“You may see a stagflation effect with high inflation in the short term, but then growth falls below potential,” he said.
Prime Minister Anthony Albanese will on Tuesday announce $4 million in federal funding for a pre-feasibility study of an oil refinery facility to be built in Western Australia by energy and fertilizer company Perdaman. The country has only two refineries, in Queensland and Victoria, and no new refineries have been built since the 1960s.
“The longer the war in the Middle East continues, the greater its impact on Australia will be, and my government will continue to do everything we can to protect Australia from the worst impacts and prepare us for the future,” he said.
While oil prices are poised to rise, the electricity market is providing some cause for optimism as renewable energy and batteries decouple Australia’s energy prices from the volatile global energy market.
Coal-fired power fell to its lowest point on record in the second quarter of the year as renewable energy production, and particularly battery production, increased, and gas reached a 20-year low, according to the latest report from the Australian Energy Market Regulatory Authority.
As a result, last quarter’s wholesale price, which is the cost for retailers to purchase electricity, dropped 47 percent compared to the same period last year.
One of the big changes in the electricity market last year was the increase in batteries, including utility-scale and home installations, which are booming under the Albanian government’s rebate plan.
Batteries store cheap and abundant solar energy throughout the day, which fills the grid to be discharged after sunset, and increasing the volume of battery storage on the grid has reduced the cost of the peak, which occurs around 6 p.m. in the afternoon, when solar production decreases and electricity demand increases as millions of people begin coming home to turn on lights and appliances.
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
Mike Foley is the climate and energy correspondent for The Age and The Sydney Morning Herald.Connect via email.
