Oil at US$113 Adds $36 to Australian Fuel Tanks

Treasurer Jim Chalmers told voters last week that the Australian economy would be "a bit better" in a year. By Friday, he acknowledged that Treasury officials are lowering their growth forecasts. The December mid-year budget update will reflect slower growth and higher unemployment, a shift driven primarily by the widening conflict in the Middle East.

The global benchmark oil price rose to US$113 a barrel overnight. This price point sits close to the April peak of nearly US$120. Since the United States and Israel attacked Iran, Australian motorists pay 60 cents more per litre. That increase adds $36 to the cost of filling a standard 60-litre tank. For a family that refuels weekly, the monthly cost rises by $144 compared to February.

Westpac analysts warn that an escalation in the conflict could push oil prices toward US$150. The International Monetary Fund issued similar warnings earlier this month. Such an outcome would intensify pressure on inflation and interest rates. The Reserve Bank may decide on a fifth rate rise on 3 November.

Global economic factors also weigh on the outlook. Heavy spending on artificial infrastructure had previously masked weakness in other sectors. Investors are now concerned about a sharp rise in corporate debt. That anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to data centre construction may further slow the build-out, adding to short-term financial stress.

Reserve Bank governor Andrew Hauser describes the current mix of high inflation, low growth, and rising unemployment as a central banker's "nightmare." Chalmers told Politico that the pressures on people are "very substantial" and keep him awake at night. He noted that the government is "hostage" to decisions made in Washington, Tehran, and Eastern Europe regarding two ongoing wars.

Domestic issues compound the external pressures. High government spending works against inflation control, a point the opposition raises frequently. Productivity growth is resting, meaning the economy reaches its speed limit sooner. Inflation runs higher at lower growth rates. Chalmers has limited options to ease voter discontent without creating new problems.

The government faces a difficult choice between two main policy options. It could cut the fuel excise temporarily to lower petrol prices, but the resulting billions in savings for motorists would make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in the December update. That would help the central bank but would weigh on the weak economy and push unemployment higher. Hauser calls this a "world of hard choices," where fixing one problem worsens another.