Australia’s government has outlined a scenario in its annual budget where escalating conflict in Iran could push oil prices to $200 per barrel and trigger a global economic crisis.
The Treasury released the analysis in Tuesday’s budget papers, warning that such a situation could arise if the conflict becomes prolonged or if escalation damages energy and export infrastructure across the Middle East, cutting off oil supply from the region, including through the Red Sea trade route.
Under this scenario, oil prices reaching $200 during the July-to-September period would cause the Australian economy to contract in that quarter. Domestic inflation would climb to 7.25% in the year through the fourth quarter, with unemployment also rising.
Shipping traffic in the Strait of Hormuz remained halted on Tuesday, with oil prices increasing after President Donald Trump rejected Iran’s latest offer and indicated a ceasefire may not hold. Brent crude rose 2% to trade above $106 per barrel.
The Treasury report stated that higher prices for fuel, fertilizer and other petrochemicals would make some businesses unviable and reduce margins for others.
“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.”
A prolonged war would also increase prices for Australian exports of coal and LNG, providing some support to the economy.
The Labor government’s central forecast predicts inflation will peak in the three months through June and then decline as the war ends. Chalmers said this outlook is “heavily dependent, heavily hostage to developments overseas for obvious reasons, including the duration of the conflict.”
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