Australia's ruling Labor government has released a doomsday scenario in its annual budget, projecting that an intensification of the war in Iran could drive oil prices to US$200 a barrel, throwing the global economy into chaos.
Scenario Details
According to the Treasury's budget papers released Tuesday, this scenario could occur if the conflict becomes protracted or escalates, damaging energy and export infrastructure across the Middle East and cutting off oil supply from the region, including through the Red Sea trade route.
Oil prices at that level in the July-to-September period would push the Australian economy into contraction in that quarter. Domestic inflation would rise to 7.25 percent in the year through the fourth quarter, while unemployment would also increase.
Impact on Businesses
Higher prices for fuel, fertilizer, and other petrochemicals would render some businesses unviable and squeeze margins for others, the Treasury said in the report.
Shipping traffic in the Strait of Hormuz remained at a standstill on Tuesday, with oil rising after President Donald Trump rejected Iran's latest offer and suggested a ceasefire may not hold. Brent crude climbed two percent to trade above US$106 a barrel.
Government Response
“We’re hostage to developments in lots of ways,” Treasurer Jim Chalmers told reporters Tuesday. “The impacts of the war in the Middle East are already serious. There is still a risk that they become quite severe and we’ve tried to give you a sense of that severity.”
However, a prolonged war would also raise the prices of Australian exports of coal and LNG, providing some support to the economy.
Central Forecast
The Labor government's central forecast is that inflation peaks in the three months through June and then starts to come down as the war ends. That is “heavily dependent, heavily hostage to developments overseas for obvious reasons, including the duration of the conflict,” Chalmers said.
