The US/Israeli war with Iran has impacted the entire Arabian Gulf region (Iraq, Iran, UAE, Kuwait, Qatar, Bahrain, and Saudi Arabia). These countries account for 30% of the world’s oil supplies, with 20% being shipped through the Strait of Hormuz. Currently, the conflict has blocked oil, gas, and other exports within the Gulf region. As a result of this, key oil and gas producers have had to reduce output. The result has been a spike in the price of oil and gas. This impacts the global markets, but a prolonged Middle East war will also impact Australian inflation figures and interest rates. How?

Fuel & Transport Costs

The price of fuel (petrol and diesel) has increased markedly over the past week or so. However, there will likely be more increases to follow as there is generally a time lag from when the oil price increases and when the fuel is available at the petrol bowser. Some economists believe that the future increases could be significant. Aside from the increased cost of running your personal vehicle, this expense is significant to the transport industry. Increased fuel costs for transportation will ultimately be passed down to the end consumer. Some Asian countries have already begun rationing petrol and diesel. Australia should hold fuel reserves of 90 days demand. Unfortunately, this is not the case, and some of our reserves we do have on paper, are also not held within the country. A prolonged conflict may erode these supplies and also cause ongoing fuel shortages. This would increase prices.

Increased Travel Costs

Global travel has been significantly disrupted by the war. Airports such as Dubai and Doha are significant freight and passenger travel hubs which are not operating to capacity. Australian travellers may decide not to travel further afield and focus instead on the closer Asian region for their holidays. This demand will no doubt push up prices for airfares. Maybe somewhat more crucial to the rising costs of travel, would be the supply disruption of, and increased cost of, jet fuel. Depending on the region and underlying airline, jet fuel can account for between 20% and 40% of an airlines operating cost. Again, this increase will be passed down to consumers. A prolonged war will increase the cost of travel.

Goods & Services

Domestic goods and services will become more expensive due to rising input and transport costs. In addition, goods or services purchased from Europe and Asia may also become more expensive. Unlike the U.S. and the Middle East who are energy producers, these regions are net importers of energy. Higher energy costs would increase the cost of production and ultimately are inflationary. Australians purchasing goods from these regions will pay more. In effect, the inflation problems for those regions would filter through to our own inflation index. In summary, a prolonged war, will increase the cost of goods made both domestically and imported from overseas.

Energy Bills

Australian energy bills are among the highest in the world. In the 1990’s, the Australian government did not want to fund the infrastructure required to mine our vast gas reserves. This infrastructure was then constructed by global oil and gas companies, who then received ongoing concessions. Most Australian states purchase gas at global prices, even though it (ironically) never actually leaves Australia. Global gas prices have increased because they are linked to the price of oil. Therefore, home and business energy costs are likely to increase over time. Maybe there will be more Government subsidies, such as those used to offset bills towards the end of 2025. These will help end consumers with increased costs. However, these payments are merely a band aid for the energy problem and do not address the underlying policy issues. The irony is that Australia is a net exporter of energy, but this does not offer us pricing protection. A prolonged war will lead to higher energy costs. This is inflationary.

Food Costs

Food costs are also likely to increase. Aside from increased transportation costs, roughly one-third of the materials used to manufacture fertiliser, pass through the Strait of Hormuz. Already the costs of fertiliser have increased markedly. Again, this cost will be passed through to the end consumer. Farmers are also likely to feel the pinch with any profits potentially being offset by cost increases. A prolonged war would increase food costs. Again, this is inflationary.

Summary

The Middle East war has come at a time when the RBA is already struggling to contain inflation. The RBA Board may look through the oil spike for a short period of time. However, they will not be able to ignore the other inflationary pressures detailed above. In addition to todays 0.25% increase, it is likely that we will see further increases to the cash rate. In turn, borrowers are likely to see higher interest rates on their loans. This may lead to some level of fall in house prices. It will almost definitely reduce discretionary spending which is not a good outcome for the local economy. A prolonged Middle East war would absolutely increase Australian inflation figures. This would force the RBA to respond, and in turn, increase existing cost of living pressures. We can only hope that a quick resolution is found before the points listed above become a more serious reality.