Oil Hits $113, Adding $36 to Australian Fuel Tanks

A family that fills a 60-litre petrol tank every week now pays $144 more per month than it did in February. This increase stems from the global benchmark oil price rising to US$113 a barrel overnight. That level sits close to the nearly US$120 peak recorded in April.

Treasurer Jim Chalmers acknowledged on Friday that Treasury officials are lowering economic forecasts ahead of the December mid-year budget update. This move follows a speech last week where he suggested the economy would be "a bit better" in a year. Slower growth and higher unemployment are now the expected outcomes.

The primary driver of these changes is a widening conflict in the Middle East. Australian motorists are currently paying 60 cents more per litre than they did before the US and Israel attacked Iran. This price hike adds $36 to the cost of a full tank for the average driver.

Risks remain elevated. The New York Times reported that the US and Israel have drawn up plans to resume attacks on Iran after American midterm elections. Westpac analysts outlined a scenario where oil prices head toward US$150. The International Monetary Fund issued similar warnings earlier this month. Such an outcome would impact inflation and interest rates, with a fifth rate rise possible on 3 November.

Global economic supports are also weakening. Heavy spending on artificial intelligence has masked weakness elsewhere, but investors are uneasy about rising corporate debt for infrastructure. This anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to datacentre construction may further slow the rush, adding short-term stress. Talk of a tech stock bubble is increasingly paired with talk of a bust.

Reserve Bank Governor Andrew Hauser described the combination of high inflation, low growth, and rising unemployment as a central banker's "nightmare." Chalmers, who is increasingly unpopular, told Politico that the pressures on people are "very substantial and obviously that keeps me awake at night." He noted that some causes lie beyond Canberra's control, while others, like cost-of-living help, are within the government's influence.

Chalmers stated that Australia is "hostage as well to decisions taken in DC or Tehran or in Eastern Europe" regarding two wars. These conflicts are pushing up inflation and weighing on growth globally. Domestically, high government spending works against the inflation fight, a point the opposition raises frequently. Productivity growth is resting, meaning the economy reaches its speed limit sooner, keeping inflation high at lower growth rates.

Each available policy option carries a cost. The government could cut the fuel excise temporarily to lower petrol prices, but the resulting billions in consumer pockets 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 assist the central bank but weigh on an already weak economy and push unemployment higher. It is unclear if such cuts would earn the government public credit.