Alan Kohler on inflation and the Israel-Iran conflict

Sam Hawley: A week since Israel began the conflict with Iran, there's been no great shock to the global economy. But a further escalation in the conflict could see crude oil and petrol prices surge, leading to nations, including Australia, having to deal with rising inflation once again. Today, the ABC's finance expert, Alan Kohler, on what that would mean for us and why, for now at least, we shouldn't be too worried. I'm Sam Hawley on Gadigal land in Sydney. This is ABC News Daily. Alan, when wars break out, we know it can have a huge impact on the global economy and on the Australian economy, on us. We saw that, of course, most recently when Russia invaded Ukraine, didn't we?
Alan Kohler: We did. There tends to be two sorts of impact. One is short-term, one is longer-term. So the short-term impact tends to be negative, in the sense that the oil price goes up. So when Russia invaded Ukraine, the oil price jumped 30%.
News report: With war in Europe continuing and some oil producers unwilling to increase production levels amid global demand, there's no relief in sight for customers.
News report: Petrol prices have gone up and up and up. At the end of February, they hit an eight-year high of around $1.82 a litre. In the last two weeks, bowsers have hovered around $2.20.
Alan Kohler: But within eight weeks, the oil price was back at its pre-invasion level, and that's because the impact longer-term is to weaken the global economy, to reduce demand. And so there tends to be kind of this two-part for all of these kind of things.
Sam Hawley: Alright, well, let's unpack then what we could see now this Israel and Iran conflict is underway. And, of course, there's a prospect that it could escalate. So let's start with the price of oil. What are we seeing so far?
Alan Kohler: So, so far, we saw when Israel attacked Iran on Friday, the oil price jumped 10 or 11% immediately.
News report: Escalating attacks between Israel and Iran prompt new fears of a global energy crisis and recession.
News report: Crude oil prices spiked by more than 10% as the escalation of the Middle East tension threatened supply. Benchmark Brent crude prices climbed above 76 US dollars a barrel to the highest level since February this year.
Alan Kohler: And then it started to fall and went a lot of the way back to where it had been. That was on Monday and Tuesday. And then, since then, as Donald Trump has increased his bellicose rhetoric and started talking about possibly attacking Iran himself, that is to say America, getting involved, the oil prices started to rise, not sharply, but steadily. And it's close to being back to where it was on Friday. So it got to 76 dollars a barrel on Friday and now it's back to 73, 74 dollars a barrel. But again, it's not what you'd say some sort of big dramatic impact so far. And I think part of the reason for that is that the expectation is that global oil supplies will exceed demand this year. The International Energy Agency put out a report on Tuesday in which it forecast demand and supply this year for oil and it's forecasting an excess of supply over demand. And the other factor is that Iran produces about 3.3 million barrels of oil a day and the expectation would be that even if that was completely knocked out, the other suppliers, in particular the UAE, Saudi Arabia and others, could easily cover that loss and probably would. So there's no kind of panic going on, even at the prospect that Iran is completely removed as a supplier of oil.
Sam Hawley: Yeah, alright. But just a reminder, of course, the price of oil matters to us because it matters to the cost of petrol.
Alan Kohler: Oh, well, look, I think the expectation would be that what happened on Friday would put about 12 cents per litre on the bowser price of petrol. At the moment, we're looking at an extra 8 or 9 cents per litre.
Sam Hawley: Well, Alan, Jim Chalmers, the Treasurer, he says he's being briefed daily about the consequences of this conflict on the economy.
Jim Chalmers, Treasurer: Big risk here is obviously oil prices. We saw a big spike on Friday in the price of oil. That has implications for Australians at the petrol bowser. And there's a lot of concern about what it might mean, not just for inflation, as important as that is, but also global growth.
Sam Hawley: A week into this new conflict between Israel and Iran, there hasn't been a huge shock, of course, for our economy yet or a huge shock for oil prices. But there is so much uncertainty, isn't there, Alan? And there is a number of factors that go into that. Let's start by discussing the Straits of Hormuz. What happens there is really important, isn't it? Just explain that.
Alan Kohler: Well, it's the narrowest part of the Persian Gulf between Iran and Oman. And it's theoretically possible for Iran to block it by bombing ships that go through it. And I think it's fair to say that ships are starting to avoid it already. They're certainly avoiding the Red Sea, but because of Yemen, what the Yemenis are doing. But yes, look, there's 25% of the world's seaborne oil goes through the Straits of Hormuz. So, yeah, that'll be a big deal if they block that, if they're able to. I mean, there's a bit of a question as to whether they can actually do it. And I think it's fair to say that it's not entirely in their hands. I mean, they could try, but then both America and Israel would probably see to it that they can't.
Sam Hawley: Yeah. Alright. Well, Iran is positioned on the northern side of the Straits. There is a slight concern, isn't there, that that could actually happen. That would have a huge impact, wouldn't it, if that did happen?
Alan Kohler: Oh, yeah, sure.
Sam Hawley: And there's a lot of unknowns at the moment, but that would have a huge impact on the price of oil.
Alan Kohler: Potentially would, yeah. If the Straits of Hormuz were successfully blocked by Iran, that would have a big impact on the oil market. The oil price would spike, and the global economy would suffer as a result. And so would ours.
Sam Hawley: Well, another factor, Alan, that we should watch out for is if Israel targets Iran's Kharg Island. Tell me about that.
Alan Kohler: It's where Iran produces its oil. I think about 90% of its oil comes from Kharg Island, and, you know, it's vulnerable. It's kind of an island off Iran in the Persian Gulf, and it could be destroyed, I think. It's fair to say.
Sam Hawley: Yeah, and a lot of that oil goes to China, I think.
Alan Kohler: That's right. In fact, if not all of it, certainly most of it goes to China because of the sanctions that were imposed by Western countries on Iran. So, look, I think the expectation is that Israel would look to destroy Kharg Island if it was trying to bring about a regime change in Iran, because the feeling is that if Iran went broke, then the regime would tend to possibly be overthrown because there would be no money for anybody. And so that's certainly a possibility that they'll do that. They seem to be more interested in bombing, you know, the uranium enrichment sites than that at this stage.
Sam Hawley: Mm. Alright, well, the impact on our economy does all sort of hinge on the cost of oil. As you say, it's pretty stable at the moment. It's been going up and down a bit. But just explain to me so we understand this. When we pay more for oil and then petrol, that can really hurt us in so many ways, can't it? When the cost of petrol goes up, that means the cost of lots of other things goes up too.
Alan Kohler: Well, of course, that's right. We haven't got that many electric cars and electric trucks yet. We're still filling the cars up with petrol mostly and it obviously acts like a tax increase and, you know, obviously increases the price of deliveries and everything. So fuel tends to go through the entire economy when the price goes up. And so it acts like interest rates in a way. A rise in interest rates slows the economy because it affects so many people. The majority of people have a mortgage and that therefore affects them and also the businesses. So it's a fuel increase, price increase, acts a bit like an interest rate increase.
Sam Hawley: Yeah, and that all leads to rising inflation, obviously, which the Reserve Bank has just brought under control.
Alan Kohler: That's right. And so that's the fear is that if inflation rises as a result of rising fuel costs, then the interest rate cuts that are currently expected will not arrive. And so it's a sort of a double whammy, really. You get the higher petrol price and then you get less of a rate cut or no rate cut maybe.
Sam Hawley: Can we look ahead any further at this point or is it just completely unknown what the Reserve Bank would have to do at this point? Looking right now, are we still going to get those two or three extra rate cuts?
Alan Kohler: Well, look, in terms of the futures market, last Thursday, the futures market expectation for a rate cut in July was 97%, so virtually a certain 100%. And on Monday, it came down to 80%. So still very likely the rate cut in July, according to the futures market, but less likely than it was. And I think that's fair enough. I mean, my expectation is that there won't be a cut in July because I think the Reserve Bank has made it pretty clear they're not that keen on back-to-back cuts sort of in a row. And that means that there wouldn't be one in July, but there would be one in August and then not one in September and then one in November. I think it's still reasonable to expect two more rate cuts this year from the Reserve Bank, but obviously, you know, that depends on what happens from here. But as things stand with the petrol price where it is, I think that you can still expect rate cuts. But as I said, a petrol price increase acts like a rate hike in a way, and so that would sort of tend to cut it out. I mean, it's kind of a bit complicated in the sense that, yes, a petrol price increase increases inflation and therefore makes it less likely that the Reserve Bank cuts interest rates, but it also tends to slow the economy, which is what the Reserve Bank is trying to fight against. So the Reserve Bank is cutting interest rates because it wants to boost the economy. But if petrol prices go up and it acts like a rate hike, then in order to counteract that, the Reserve Bank might be inclined to cut interest rates more to try to counteract the impact of the petrol price increase. So it depends on how it actually unfolds and what actually does happen to inflation rather than, you know, the sort of theories about it.
Sam Hawley: All right. Well, no need by the sound of it for the Reserve Bank to panic just yet. But if this becomes an extended conflict, if other nations, including, of course, the United States, gets involved, I guess that could change the whole scenario.
Alan Kohler: Look, it could. I think the markets are pretty calm at the moment because the expectation is that it'll all be confined to Iran and that if the worst happens and Iran is removed as a producer of oil, then everyone can handle that. It'll be okay. The only problem would be if it really did expand to include other big oil producers, which is not out of the question but very, very unlikely. You know, Iran has threatened in the past and has used its proxies in Yemen to attack Saudi Arabian production facilities. So it's not completely out of the question that Iran would have a go at that. But, you know, I think they're on the back foot at the moment. There's no doubt about it. I mean, they're in trouble, Iran. And I don't think that there's any expectation, really, that they're going to be in any kind of position to attack anyone else. So, you know, I think that it doesn't look that likely that it's going to spread and become a major conflict where Iran attacks someone else. I just don't... That doesn't look like it's at all likely.
Sam Hawley: Alan Kohler is ABC TV's finance expert. This episode was produced by Sydney Pead and Sam Dunn. Audio production by Adair Sheppard. Our supervising producer is David Coady. I'm Sam Hawley. ABC News Daily will be back again on Monday. Thanks for listening.

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