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Almost one million Australians could be out of work and inflation could pass 6.5 per cent if the crude oil price spikes to $US150 per barrel in one of two nightmare scenarios modelled by Deloitte Access Economics.
A price of $US175 a barrel, a scenario that would only be likely in the event of a protracted Middle East war, would plunge the Australian economy into a deep recession. Unemployment would climb beyond a million people to about 6.8 per cent and inflation would hit 7.5 per cent.
Several analysts, including those from AMP and Oxford Economics, have warned $US150 a barrel prices are likely if the Strait of Hormuz is not opened in the coming weeks. In this scenario, Deloitte predicts inflation could hit 6.6 per cent by year’s end, the economy would be entering recession and more than 950,000 people would be unemployed.
At $US175 a barrel, activity in the air transport sector would have collapsed by 8.3 per cent, or the equivalent of a 150,000 drop in inbound tourist flights through the peak Christmas period.
Under both scenarios, the manufacturing and tourism sectors would be the hardest hit.
Crude oil, priced below $US60 per barrel earlier this year, spiked to more than $US110 per barrel after the US and Israel attacked Iran, preventing the flow of cheaper oil through the Iran-controlled Strait of Hormuz. After a ceasefire was negotiated in recent days, the price fell below $US100.
The prospect of a lasting peace appeared more remote on Sunday after the US and Iran failed to reach a peace deal in talks hosted by Pakistan.
Shipping data showed some oil tankers were allowed to pass through the Strait of Hormuz on Sunday, Australian time, but a source speaking to Iran’s Tasnim News Agency following the peace talks said the nation would continue to restrict access to the waterway through which 20 per cent of the world’s oil supply travels.
Last month, Treasurer Jim Chalmers revealed modelling that showed the impact a protracted war in the Middle East would have on the Australian economy. If oil prices remained about $US100 a barrel before easing by year’s end, economic growth would be 0.2 per cent lower over the year, while inflation would approach 5 per cent, well above the Reserve Bank’s target of 2 per cent to 3 per cent.
Treasury’s analysis of oil prices around $US120 a barrel showed the economy taking a 0.6 per cent hit by the middle of next year in an impact that would last until 2029. Inflation would push above 5 per cent.
Chalmers did not reveal Treasury predictions for the impact of even higher oil prices, as the Deloitte research does.
Deloitte Access Economics lead partner Pradeep Philip said the severe scenarios did not account for government actions aimed at mitigating the economic fallout.
“The more severe scenarios would tip us well and truly into recession, with a big jump in unemployment. This would be the recession we didn’t ask for,” he said.
There is no end in sight to oil price volatility, following the failure of the US and Iran to reach a deal after their first meeting since the ceasefire began.
Iranian state media reported that “excessive” US demands were responsible for the failed negotiation. US Vice President JD Vance, who led the US delegation in the discussions, said Iran’s nuclear program was a sticking point in the attempted peace talks.
“We’ve had a number of substantive discussions with the Iranians,” he said. “That’s the good news. The bad news is that we have not reached an agreement. And I think that’s bad news for Iran much more than it’s bad news for the United States of America,” he said in Islamabad.
Pakistan’s Foreign Minister Ishaq Dar, who helped facilitate the negotiations, called on both parties to continue to respect the ceasefire. Foreign Minister Penny Wong described the lack of an agreement as “disappointing”.
‘Australia gets a pay rise’
Meanwhile, budget analyst Chris Richardson urged Chalmers not to squander a $30 billion oil and inflation-fuelled windfall that the Middle East crisis will deliver to the coming budget.
Richardson said the May 12 budget would benefit from an extra $8 billion in personal income tax collections and $13.1 billion from businesses.
In his mid-year update in December, Chalmers forecast a deficit of $34.3 billion for 2026-27. Richardson said it was on track to be less than half that at $14.3 billion.
Richardson, whose forecasts do not take into account any changes that may be announced by Chalmers on May 12, said the surge in oil prices and Australia’s pre-war inflation rate meant the budget was in better shape than expected.
“In effect, the world just gave Australia a pay rise, and the government gets a chunk of that,” he said.
“And although the ceasefire has also reduced the fire under fuel prices, there’s enough damage to infrastructure and ongoing uncertainty to ensure the pay rise the world has granted us disappears slowly, rather than fast.”
Company tax collections are expected to be stronger, given the underestimation of key commodity prices.
In December, the government was expecting thermal coal spot prices to fall to $US70 a tonne and iron ore to slip to $US60 a tonne. Instead, this week they were at $US111 and $US103 a tonne respectively.
Chalmers has said this year’s budget will contain packages covering spending cuts, taxation reform and productivity-related reforms aimed at increasing the rate at which the economy can grow without adding to inflation.
But the government halved the petrol and diesel excise for three months to deal with the spike in fuel prices caused by the war against Iran. That will cost the budget almost $2.6 billion.
Opposition Leader Angus Taylor said Richardson’s analysis meant the government should not use extra revenue for more spending. “The test in this budget is clear: bank the windfall, pay down debt and rebuild the fiscal buffers Australia needs for the future,” he said.
with Brittany Busch
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.From our partners
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