Australia’s cost of living crisis is set to worsen as the terrorist attacks on Israel push up crude oil prices – potentially sparking another rate rise with the local currency at the weakest level in a year.
Motorists, already paying more than $2 a litre for E10 unleaded petrol, face paying even more for fuel as oil producing nations take advantage of geopolitical conflict in the Middle East.
This is occurring as a weak Australian dollar makes crude oil more expensive, which could worsen inflationary pressures and potentially lead to another interest rate rise from the Reserve Bank next month.
Iran, a major oil producer, has been linked with the Hamas attacks in Israel that have so far killed more than 1,100 people, including more than 700 Israelis.
Militant group Hezbollah reportedly suggested Iranian security officials approved of the attack inside Israel by Palestinian militants, who paraglided in from the Gaza City over a fortified border wall before taking Israeli citizens hostage.
Bread and cereal costs went up by 10.4 per cent, on an annual basis, and more expensive transport costs could add to already-bad price pressures.
Dearer petrol could also reverse the recent decline in fruit and vegetable prices as a weaker Australian dollar made electronic goods, clothing and cars more expensive, in several months’ time.
Australia’s cost of living crisis is set to worsen as the terrorist attacks on Israel push up crude oil prices (pictured are burning cars in the southern Israeli city of Ashkelon)
Motorists, already paying more than $2 a litre for E10 unleaded petrol, face paying even more for fuel as oil producing nations take advantage of geopolitical tensions in the Middle East (pictured is a Sydney service station)
But economist Saul Eslake, the principal of Corinna Economic Advisory, said oil producing nations could ‘potentially’ withhold supply to exploit geopolitical tensions in the Middle East.
‘The market itself might push oil prices up, anticipating something,’ he told Daily Mail Australia.
‘You expect oil prices to go up on speculation.’
Higher petrol prices have broader, flow-on effects for Australian inflation, as sellers of goods pass on to consumers higher transport costs.
‘If wholesalers and distributors think that the prices are going to stay high, they’ll probably seek to recoup increased transport costs by charging higher prices,’ Mr Eslake said.
This could see a repeat of early 2022 when Russia’s invasion of Ukraine led to sanctions that pushed up global crude oil prices, leading to high inflation in Australia.
High inflation, from surging petrol prices, could also lead to another interest rate rise in November, following the October 25 release of consumer price index data for the September quarter.
This would take the RBA cash rate up to a 12-year high of 4.35 per cent and mark the 13th rate rise since May 2022, with home borrowers already dealing with the most aggressive hikes since 1989.
‘What will influence whether they decide to respond by raising interest rates is whether there has been the pass-through from higher petrol prices into the prices of other things that get transported or which use oil in them like plastics,’ Mr Eslake said.
Elevated petrol prices also means consumers expect inflation to stay high, which would worry the Reserve Bank, already expecting the consumer price index to stay above its three per cent target until June 2025.
The Australian dollar last week fell below 63 US cents for the first time in a year.
The unprecedented sacking of former US Republican Speaker Kevin McCarthy, by disgruntled members of his own party, is also worrying financial markets which weakens the Australian dollar, because its fortunes are tied to global risk appetite.
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, should the Republican Party’s next speaker refuse to do a deal to resolve the debt ceiling crisis and politically cripple Democrat President Joe Biden as government services are shut down.
‘Although there’s not normally a relationship between the fear index and the $A, when the fear index moves a lot, which it would do if financial markets were to seize up, then the $A would almost certainly drop below 60,’ he said.
A weaker Australian dollar also makes crude oil more expensive because it is sold in US dollars.
‘One obvious one would be to magnify the impact of the increase in crude oil prices,’ Ms Eslake said.
‘There are two things that determine the price of petrol at the pump: the US dollar price of crude oil and the $A-US dollar rate.’
A weaker Australian dollar would also see consumer pay more for overseas holidays, straight away, and eventually more for goods like electronics and cars which are ordered in bulk months in advance.
‘That would be an immediate, obvious impact; overseas holidays would be an immediate impact; a broad range of consumer durables would show up after a lag of some months,’ Mr Eslake said.
The terrorist attack on Israel occurred near the 50th anniversary of the Yom Kippur War sparked by Egypt and Syria launching a surprise attack on Israel on a holy Jewish holiday.
While Israel quickly reclaimed territory, OPEC nations cut supply of oil to Western nations that had backed Israel, causing most of the developed world to have double-digit inflation during the 1970s.
This time, the Muslim world is less united with Saudi Arabia, a major oil producer, in the process of formally recognising Israel – a US-led effort that could yet be derailed.
Economist Saul Eslake, the principal of Corinna Economic Advisory, said oil producing nations could ‘potentially’ withhold supply to exploit geopolitical tensions in the Middle East (pictured is an Israeli airstrike on Gaza City)
Mr Eslake said that made a repeat of the 1970s OPEC oil crisis unlikely, with the US now more self sufficient for its crude oil thanks to fracking, while Canada is now the world’s fourth largest oil producer.
‘The differences of opinion between Saudi Arabia and Iran are such that it would be difficult to put together the alliance that led to the oil embargo in ’73-74,’ he said.
‘Saudi Arabia and Iran are rivals for influence in the Persian Gulf region.’
In 2023, Russia is closely aligned with Iran, which wasn’t 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, which means global inflation would stay higher for longer.
‘It would not be good for the world to have two significant conflicts going on at once,’ Mr Eslake said.
Source: | This article originally belongs to Dailymail.co.uk
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