Australians can expect high fuel costs to linger for far longer than the war in Iran | US-Israel war on Iran

As diesel prices make history by exceeding $3 per liter in almost every capital city in the country, the stress caused by high fuel costs is starting to show itself.

Truckers warn they will go bankrupt if they can’t renegotiate their contracts with their customers; Farmers are warning the same way, telling families that food in supermarkets could soon become more expensive.

Small miners are already scaling back their operations and airlines are either increasing daily wages or reducing flights.

Meanwhile, fuel prices continue to increase.

Construction industry groups warn builders will be charged “fuel surcharges” of 8 percent to 10 percent; This adds to the very high costs that never return to normal after pandemic disruptions.

“We’re worried that the longer this takes, the longer the queue will be,” Denita Wawn, chief executive of Master Builders Australia, told the ABC.

“We saw this with Covid, when things got back to normal for everyone, the tail was literally 12 months,” Wawn said.

This long tail also worries the government.

Australian fuel prices have risen nearly 40% since Israel and the US began bombing Iran, which has effectively closed the Strait of Hormuz and blocked 20% of global oil trade.

Jonathan Kearns, Challenger’s chief economist and a former Reserve Bank official, reiterated the general consensus that headline inflation will move from 3.7% to 5% in the coming months.

This alone seems to support the case for three additional interest rate hikes by the Central Bank as priced in financial markets for 2026.

But the picture is more nuanced than that.

The post-Covid cost of living shock has been tempered by a recovering economy and a hiring spree that has seen Australians take up a larger share of the workforce than ever before.

But the stagflation effect of energy shocks means that both inflation and unemployment rise as the economy slows and businesses cut back on hiring.

According to the weekly ANZ-Roy Morgan survey, consumer confidence has already fallen to its lowest level in history dating back to 1973 (incidentally also the year of that decade’s first oil shock).

Since the starting point was already pessimistic, we are now even gloomier than during the 2020 national lockdown.

“The RBA will struggle to keep the economy balanced as economic growth slows despite the oil supply shock driving up inflation,” Kearns said.

As the Iran war drags on and fuel prices continue to rise, experts and officials are beginning to war game with more extreme scenarios, including fuel rationing.

International Energy Agency President Fatih Birol was in Canberra this week and delivered an effective wake-up call to the country and the world.

Birol stated that the disruptions in oil supply in the Middle East were twice as large as those experienced in the 1970s, and that the war created as big a shock in global gas markets as Russia’s invasion of Ukraine.

This dire analysis may have influenced Jim Chalmers’ decision to ask Treasury officials to look at even more “challenging conditions” where crude oil prices rose above $120 a barrel and stay there.

“The end of this war cannot come soon enough for the economy,” Chalmers told reporters on Wednesday. he said.

The treasurer said the government was preoccupied with two “important matters”.

“First of all, it’s the timing of the end of the war,” he said. “And secondly, how long will it take for the global economy to get back on track after the hottest part of hostilities?”

Australians are blaming the government for the consequences of Donald Trump’s decision to help start a war in the Middle East without clear objectives or an exit strategy.

With so much on his plate, Chalmers has the mammoth task of crafting a budget that responds to the global energy shock in a way that satisfies voters, supports the economy and does not increase inflation.

The longer fuel prices remain high, the more likely it is that the government will provide some assistance to households; ideally targeted at more vulnerable Australians and not through fuel subsidies.

Economists at Barrenjoey expect a “muted” response from the government.

But when it comes to the real worst-case scenario, where we face national fuel shortages and rationing, budget strategy changes dramatically.

“If there were a risk of fuel shortages across the country due to the inability to import refined oil, we could see a potential crisis-level government response and fuel rationing,” they say.

“The economic consequences of fuel shortages could be potentially significant,” including a collapse in business and consumer confidence and a possible “material” increase in unemployment.

“We expect a crisis-level fiscal and monetary response to support the economy.”

They say such a scenario is unlikely.

However, it is becoming more and more likely that the Iran war will continue with each passing day.