Updated ,first published
The global economy is facing its biggest shock since the depths of the pandemic after oil prices soared to $US116 a barrel and $80 billion was wiped from the Australian sharemarket with fears the war against Iran could plunge the United States into recession.
A day of panic across commodity and equity markets, which at one point saw the ASX200 down by more than $110 billion, was prompted by fears that oil and gas production out of the Middle East will be dramatically curtailed as refineries close or come under attack.
Crude oil prices, which climbed by almost 30 per cent at one point, blew past a landmark they last exceeded during the early days of Russia’s invasion of Ukraine.
The situation has become so alarming that, according to the Financial Times, G7 finance ministers will hold an emergency meeting early Tuesday morning Australian time to discuss the possible release of oil from their petroleum reserves.
News of the meeting prompted a reversal in oil prices which, after moving above $US116 a barrel, fell back to around $US101 a barrel. That was too late for the Australian sharemarket, with the S&P/ASX 200 down more than 4 per cent by midday before it rallied and closed about $80 billion lower.
The morning’s fall was the biggest decline on the ASX since April last year, when US President Donald Trump announced plans to impose sweeping tariffs on trading partners.
Since the war started, the Australian sharemarket has shed $200 billion.
The turmoil has also spread to interest rates on government debt, creating a fresh headache for Treasurer Jim Chalmers.
Interest rates on 10-year Australian government bonds climbed above 5 per cent for a short period before retreating to 4.973 per cent.
Before the war, the interest rate was around 4.6 per cent.
A lift in interest rates will hurt the federal budget, with interest payments already one of the government’s fastest-growing expenses. This financial year, the government is forecasting to spend $25.5 billion in interest on almost $1 trillion in gross debt.
In the mid-year budget update, Treasury warned that a lift in interest rates would “lead to a deterioration in the underlying cash balance”, which would mean an increase in total government debt.
Chalmers said the Council of Financial Regulators, which is made up of Treasury, the Reserve Bank, ASIC and APRA, is meeting daily to discuss the situation.
“We are continuing to closely monitor the economic impacts of the conflict in the Middle East,” he said.
“We’re already seeing the impact of hostilities on global equity, commodity, debt and currency markets and we are not immune from all this volatility.”
The escalating conflict is effectively shutting down shipping in the Strait of Hormuz off Iran’s coast, where roughly one-fifth of the world’s oil is typically transported.
Without room to store oil, the United Arab Emirates and Kuwait began reducing oil production over the weekend. The cutbacks by the two OPEC members follow a swath of others in the region.
Last week, Saudi Arabia shut its biggest refinery and Qatar closed the world’s largest liquefied natural gas export plant after drone attacks. On Monday afternoon, Reuters reported thick smoke coming from the Bapco oil refinery in Bahrain.
“The longer this war drags on, the larger the upside risk to oil prices – and presumably the pressure on Trump to try and strike a deal,” BetaShares chief economist David Bassanese said. “I suspect the resilience of the Iranian regime in the face of heavy attacks has surprised the US, but whether it can continue to hold out remains to be seen.”
NAB chief economist Sally Auld said the surge in oil prices meant Australia’s inflation rate could reach 5 per cent by the middle of the year.
She said the situation would be a concern for the Reserve Bank as it sought to balance the jobs market against inflationary pressures.
“The nature of a supply-side shock to oil means that it will place upward pressure on inflation and if sustained, it will lower GDP growth too,” she said.
“This is an uncomfortable set of outcomes for any central bank, as it sees movement away
from both inflation and full-employment mandates.”
Auld said if oil prices eased to around $US80 a barrel over the next fortnight, the Reserve would likely inflict another quarter percentage point interest rate increase on borrowers at its May meeting.
But if the war continued, the fallout from high oil prices on inflation and growth would grow, creating more difficulties for the Reserve.
The mixed impact of high oil prices is already playing out in the United States, where expectations for two rate cuts this year have evaporated. Some betting markets put the chance of an American recession by December at 40 per cent.
The crisis is also bearing down on Asia and Europe, which are heavily dependent on liquid natural gas from the Persian Gulf.
“LNG is going to be impacted far more than oil given [there is] far less LNG storage, low European gas stocks, and no avenues to export Qatar LNG that bypass the Strait of Hormuz,” MST Financial energy analyst Saul Kavonik said.
Another energy analyst, Morgan Stanley’s Martijn Rats, said the best-case scenario was for oil to start flowing “within days, not weeks”, which would keep prices in the $US80 per barrel range.
If oil supply slowed for weeks, prices could potentially stay well above $US130, he said.
US stock futures tumbled further on Monday, pointing to more pain for its sharemarkets. The panic also spread to Asia where both Japan’s Nikkei and Korea’s KOSPI were down around 7 per cent.
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Simon Johanson is a business journalist at The Age and The Sydney Morning Herald.Connect via X or email.
Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.
