Australia's government has conducted a doomsday scenario analysis in its annual budget, modeling a situation where the war in Iran intensifies, driving oil prices to US$200 a barrel and plunging the global economy into chaos. The analysis, released by the Treasury on Tuesday, outlines the potential impact on the Australian economy if the conflict escalates further.
Scenario Details and Economic Impact
According to the Treasury's budget papers, a protracted conflict or escalation that damages energy and export infrastructure across the Middle East could shut off oil supply from the region, including through the Red Sea trade route. Under this scenario, oil prices at US$200 a barrel in the July-to-September period would push the Australian economy into contraction during that quarter. Domestic inflation would surge to 7.25% in the year through the fourth quarter, while unemployment would also rise.
Shipping traffic in the Strait of Hormuz remained at a standstill on Tuesday, with oil prices climbing after President Donald Trump rejected Iran's latest offer and suggested a ceasefire may not hold. Brent crude rose 2% to trade above US$106 a barrel.
Broader Economic Consequences
Higher prices for fuel, fertilizer, and other petrochemicals would render some businesses unviable and squeeze margins for others, the Treasury noted. Treasurer Jim Chalmers told reporters on Tuesday that Australia is "hostage to developments in lots of ways." He added, "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."
However, a prolonged war would also raise prices for Australian exports of coal and LNG, providing some support to the economy. The Labor government's central forecast assumes that inflation peaks in the three months through June and then begins to decline as the war ends. This forecast is "heavily dependent, heavily hostage to developments overseas for obvious reasons, including the duration of the conflict," Chalmers said.
Context and Previous Reports
The scenario analysis underscores the fragility of the global economy amid ongoing geopolitical tensions. Australia's reliance on energy exports and its exposure to global supply chains make it particularly vulnerable to disruptions in the Middle East. The budget papers serve as a warning of the potential severity of the situation, even as the government hopes for a de-escalation.
