Petrol prices could hit $2 per litre if Middle East tensions escalate

Economists have warned that under a worst-case scenario Australian petrol prices could hit $2 per litre, if tensions between the United States and Iran escalate into a full-blown war.

“A full-blown US-Iran conflict … could cause the oil price to rise to $US150 per barrel this year,” head of global economics service at Capital Economics Jennifer McKeown told clients. “This is not our base case, but with President Trump claiming that the US is ‘locked and loaded’, the risks have increased.”

Crude oil futures prices – which are considered the global benchmark – were trading at $US68.51 on Tuesday following a record single-day spike earlier in the week, data from Refinitiv shows.

A doubling in prices would lift crude oil beyond the record peak of $US147.50 per barrel hit just before the onset of the global financial crisis in 2008.

AMP chief economist Shane Oliver said each $US1 increase per barrel in oil prices leads to a 0.9 cent lift in petrol prices per litre, assuming no change to the Australian dollar. Therefore, in a scenario where crude oil more than doubles to $US150 per barrel, petrol prices could surge above $2 per litre.

Based on data from the Australian Institute of Petroleum, the average capital city unleaded petrol price rose to a three-month high of 143.6 cents per litre last week.

Mr Oliver said if the current spike in oil prices were sustained it would lead to an increase in petrol prices of about 6 cents to 10 cents per litre. But if oil prices doubled, as they have done in past Middle East crises, it would pose a significant problem for households. “This would push petrol prices up to around $1.95 a litre. Such a rise in petrol prices would push the typical Australian family’s weekly petrol bill up to around $68 compared to $49 last month,” he said.

An increase of that magnitude would offset recent income-tax refunds for low and middle-income households and also reduce the benefits of interest rate cuts, placing further pressure on consumer spending, he said.

In the latest ANZ Bank-Roy Morgan Research Australian consumer confidence survey, released on Tuesday, sentiment slumped to the lowest level in two years. The decline was driven by a steep deterioration in expectations for household finances and the economy in the years ahead.

“While households feel okay about their current financial situation, they are clearly quite worried about the outlook, for both their own finances and the economy,” ANZ senior economist Felicity Emmett said.

The minutes of the RBA’s September board meeting released on Tuesday noted recent contact with retailers suggested that income tax offsets “had yet to lift spending noticeably”.

But, the RBA said that income tax rebates were “expected to boost household income, and thus support consumption growth, in coming quarters.”

 

Extracted from The Sydney Morning Herald

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