The International Monetary Fund (IMF) has warned that a significant rise in global oil prices could lead to a sharp increase in fuel costs across Australia. In its latest World Economic Outlook, the IMF modeled a scenario where oil prices jump to $US130 a barrel due to an extended Middle East crisis, which could push Australian petrol prices up by 30 cents per litre. The scenario assumes the conflict persists through the end of June 2027, disrupting key shipping routes and delaying oil supply recovery.
Unleaded petrol prices in major east coast cities have already risen above $2.40 per litre, nearing six-month highs, while diesel prices remain high at around $2.80. Economists suggest that a $US30 increase in oil prices could drive unleaded petrol towards $2.70, the highest since the start of the war over seven months ago. Such a rise could elevate inflation by more than 1 percentage point by the end of the year, exacerbating cost-of-living pressures and slowing economic growth.
Jonathan Kearns, chief economist at Challenger, stated that the Reserve Bank of Australia (RBA) would likely respond to higher fuel costs with higher interest rates, though the extent of the hikes remains uncertain. The RBA recently delivered a fourth interest rate hike, with board members noting the escalating Middle East conflict and rising oil prices. Jonathan McMenamin, head of economic forecasts at Barrenjoey, expects inflation to reach 4.2% in the year to September, up from 4% in August, with every 10% rise in fuel prices adding 0.33 percentage points to headline inflation.
McMenamin, however, was skeptical about the necessity of further interest rate hikes, arguing that the RBA has primarily responded to domestic price pressures rather than overseas factors. The RBA's prediction of inflation falling to 3.6% by the end of the year is based on the Brent crude price dropping to $US81. If oil prices instead surge to $US130, inflation could remain as high as 4.5% in late 2026.