Price Increments Expected in Australia Following Recent Attacks on Israel

Australia’s cost of living crisis is set to worsen as terror attacks on Israel drive up crude oil prices, which could trigger another rate hike with the local currency at its lowest level since a year.

Motorists, who already pay more than $2 per liter for E10 unleaded gasoline, will have to pay even more for their fuel as oil-producing countries profit from geopolitical conflict in the Middle East.

This comes as the weak Australian dollar makes crude oil more expensive, which could worsen inflationary pressures and potentially lead to another interest rate hike from the Reserve Bank next month.

Iran, a major oil producer, has been linked to Hamas attacks in Israel that have so far killed more than 1,100 people, including more than 700 Israelis.

The militant group Hezbollah reportedly suggested that Iranian security officials approved the attack in Israel by Palestinian militants, who arrived by paraglider from Gaza City over a fortified border wall before taking Israeli citizens in hostages.

Even before the atrocities, gasoline prices had jumped 13.9 percent in the year to August, causing the monthly inflation level to rise to 5.2 percent, from 4 .9 percent in July.

The costs of bread and cereals have increased by 10.4 percent on an annual basis, and higher transport costs could worsen the already strong pressure on prices.

More expensive petrol could also reverse the recent decline in fruit and vegetable prices, with the weak Australian dollar making electronics, clothing and cars more expensive within months.

Australia sources its oil from refineries in Singapore, which import crude from Indonesia and Malaysia, two Muslim-majority countries.

But economist Saul Eslake, director of Corinna Economic Advisory, said oil-producing countries could “potentially” suspend supplies to exploit geopolitical tensions in the Middle East.

“The market itself could be pushing up oil prices, anticipating something,” he told Daily Mail Australia.

“You expect oil prices to rise on speculation. »

Rising petrol prices have wider knock-on effects on Australian inflation, as sellers of goods pass on higher transport costs to consumers.

“If wholesalers and distributors think prices will remain high, they will likely seek to recoup increased transportation costs by charging higher prices,” Mr. Eslake said.

This could be repeated in early 2022, when Russia’s invasion of Ukraine led to sanctions that sent global crude oil prices soaring, leading to high inflation in Australia.

High inflation, driven by rising gasoline prices, could also lead to another interest rate hike in November, following the October 25 release of Consumer Price Index data for the quarter of September.

This would take the RBA spot rate to a 12-year high of 4.35 percent and mark the 13th rate hike since May 2022, with property borrowers already facing the most aggressive hikes since 1989.

“What will influence their decision to respond by raising interest rates is the impact of rising gasoline prices on the prices of other things that are transported or use oil, such as plastics.” , said Mr. Eslake.

High petrol prices also mean consumers expect inflation to remain high, which would worry the Reserve Bank, which already expects the Consumer Price Index to remain higher to its objective of 3% until June 2025.

Last week, the Australian dollar fell below 63 US cents for the first time in a year.

The unprecedented dismissal of former US Republican President Kevin McCarthy by disgruntled members of his own party is also worrying financial markets, weakening the Australian dollar, whose fortunes are linked to global appetite for risk.

Mr Eslake said the Australian dollar could plunge below 60 US cents for the first time since March 2020, at the start of the Covid pandemic, if the next Republican Party president refused to strike a deal to resolve the crisis. debt ceiling and politically paralyze the Democratic president. Joe Biden while government services are closed.

“Although there is normally no relationship between the fear index and the Australian dollar, when the fear index moves a lot, which would happen if the financial markets seized up, then the Australian dollar would almost fall definitely below 60,” he said. .

A weaker Australian dollar also makes crude oil more expensive because it is sold in US dollars.

“An obvious solution would be to amplify the impact of rising crude oil prices,” Ms Eslake said.

“There are two things that determine the price of gasoline at the pump: the price of crude oil in U.S. dollars and the price of the U.S. dollar relative to the U.S. dollar.”

A weaker Australian dollar would also lead to consumers immediately paying more for overseas holidays, and potentially more for goods such as electronics, clothing and cars, ordered in bulk months in advance.

“It would be an immediate and obvious impact; holidays abroad would have an immediate impact; a wide range of consumer durable goods would appear after a lag of a few months,” Mr Eslake said.

The terrorist attack on Israel occurred ahead of the 50th anniversary of the Yom Kippur War sparked by Egypt and Syria launching a surprise attack on Israel during a holy Jewish holiday.

As Israel rapidly regained territory, OPEC countries cut oil supplies to Western countries that had supported Israel, causing double-digit inflation in most developed countries during the 1970s.

This time, the Muslim world is less united with Saudi Arabia, a major oil producer, in the process of formally recognizing Israel — a U.S.-led effort that may yet fail.

Mr Eslake said this made a repeat of the OPEC oil crisis of the 1970s unlikely, with the United States now more self-sufficient in its crude oil through fracking, while Canada is now the fourth largest producer world oil.

“The differences of opinion between Saudi Arabia and Iran are such that it would be difficult to establish the alliance that led to the oil embargo in 1973-1974,” he said.

“Saudi Arabia and Iran are rivals for influence in the Persian Gulf region.”

In 2023, Russia is closely aligned with Iran, which was not the case 50 years ago.

But a protracted war between Israel and Hamas is also occurring alongside a long-running war between Russia and Ukraine, meaning global inflation would remain high for longer with crude oil suppliers among the conflict’s players .

“It would not be good for the world to have two major conflicts at the same time,” Mr. Eslake said.