Think petrol prices are bad now? It's entirely possible you ain't seen nothing yet.
Think petrol prices are bad now? It's entirely possible you ain't seen nothing yet, if a worse-(but not worst)-case scenario plays out in the war in Iran.
Westpac has updated its modelling on the economic impacts brought about by the conflict, particularly on energy costs.
The big four bank's baseline – the scenario it thinks is most likely to play out – is the war lasts about a month, but that shipping through the Strait of Hormuz takes a further month to normalise.
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If that does play out, the bank forecasts oil prices will hit $US110 a barrel but average out at $US90 between April and June, with flow-on effects to hit Australian motorists, and economic growth to take a 0.1 of a percentage point hit.
"Petrol and diesel prices are likely to rise by more than the direct pass-through from higher crude oil prices alone," said Sian Fenner, Westpac's head of business and industry economics.
"As a result, we expect retail petrol and diesel prices to average around $2.02/litre and $2.50/litre respectively.
"Fertiliser prices such as urea are also up sharply and some airlines have already announced price increases due to the rise in jet fuel."
Considering Australian petrol and diesel prices already averaged 219.5 and 245.6 cents a litre last week, and Brent crude is currently sitting above $US100 a barrel, that appears to be a relatively sedate impact on the economy for what the International Energy Agency has labelled the worst oil supply shock in global history.
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However, there is significant uncertainty about how long the war will last, with US President Donald Trump's erratic statements about a timeframe, and his boasting that the conflict is won while demanding help from allies to open the Strait of Hormuz, doing nothing to quell market volatility.
Fenner said there "remains a material risk of a more extensive and prolonged disruption", and Westpac's alternative scenario now has the conflict lasting three months.
In such a case, the economic impact would be far worse.
Oil prices would average $US130 a barrel in the second quarter of the year, and at their peak would hit $US200.
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Given Australian petrol prices rise about 1 cent per litre for every dollar oil increases by, drivers could end up being slugged more than $3 a litre in the coming months.
Underlying inflation would also remain above the Reserve Bank's target until well into 2027, and half a percentage point would be lopped off Australia's overall economic growth.
In a sobering end to her research note, Fenner said the turmoil could be even worse if energy infrastructure suffers permanent damage.
"This (alternative) scenario assumes no significant damage to oil and LNG production and freight facilities," she wrote.
"A permanent loss of supply would prolong the cost to the real economy.
"It would also add to the risk of a sell-off in financial markets that would not only amplify the negative shock to the global economy but complicate the policy response."
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The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.
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