Middle East fight makes petrol $36 more per tank before Treasury cuts growth forecast

A full tank of petrol now costs $36 more than it did in February. The global benchmark oil price reached US$113 a barrel overnight, moving closer to the nearly US$120 peak set in April.

Treasurer Jim Chalmers acknowledged on Friday that Treasury officials are cutting their economic forecasts. These changes will appear in the December mid-year budget update. The new projections point to slower growth and higher unemployment.

The primary driver is the widening conflict in the Middle East. Australian drivers pay 60 cents more per litre than before the United States and Israel attacked Iran. For a family that refills a 60-litre tank every week, that adds $144 to their monthly expenses compared to the start of the year.

The situation may worsen. The New York Times reported that American and Israeli leaders have drafted plans to resume attacks on Iran after the upcoming midterm elections. Analysts at Westpac warned that an escalation could push oil prices toward US$150. The International Monetary Fund issued similar concerns earlier this month.

Such a price jump would strain inflation and interest rates. A fifth rate rise is possible on 3 November. The global economy is also losing a key support pillar. Heavy spending on artificial intelligence has masked weakness in other sectors, but investors are now anxious about rising corporate debt for infrastructure build-outs. This anxiety triggered a steep sell-off on Wall Street overnight.

Reserve Bank Governor Andrew Hauser described the mix of high inflation, low growth, and rising unemployment as a central banker's nightmare. It is a difficult position for Chalmers, who faces an unpopular government and a need for public wins. He told Politico that the current pressures on people are substantial and keep him awake at night.

Chalmers noted that some causes are beyond Canberra's control. He said the government is hostage to decisions made in Washington, Tehran, and Eastern Europe. Two wars are pushing up global inflation and weighing on growth. Domestic factors are not helping either. High government spending works against the inflation fight, a point the opposition raises frequently. Productivity growth is slow, meaning the economy hits its speed limit sooner.

The government has limited options to ease voter discontent. It could temporarily cut the fuel excise to lower petrol prices. However, the billions of dollars saved by motorists would make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in the December update. That move would assist the central bank but weigh on a weak economy and push unemployment higher. It is unclear if the government would earn credit for such cuts.

Hauser called this a world of hard choices. In this environment, fixing one problem often worsens another. The government must choose between immediate relief for consumers and long-term economic stability.