Oil at $113 adds $36 to fuel costs

Australian drivers face a $36 increase for a full 60-litre tank as global oil prices hit US$113 a barrel.

This spike brings the cost close to the April peak of nearly US$120. The rise in the global benchmark price occurred overnight. It follows a widening conflict in the Middle East.

Treasurer Jim Chalmers acknowledged on Friday that Treasury officials are lowering their economic forecasts. This decision comes ahead of the December mid-year budget update. Officials now expect slower growth and higher unemployment. In a speech last week, Chalmers suggested the economy would be a bit better in a year. He has since revised that outlook.

The price increase translates to 60 cents more per litre for motorists compared with the period before the US and Israel attacked Iran. For a family that fills up weekly, the extra cost amounts to $144 per month compared with February.

Analysts at Westpac outlined an escalation scenario where oil prices could reach US$150. This projection echoes warnings from the International Monetary Fund issued earlier this month. The New York Times reported that the US and Israel have drawn up plans to resume attacks on Iran after the American midterm elections. Such an outcome would impact inflation and interest rates. A fifth rate rise is possible on 3 November.

The Reserve Bank of Australia Governor Andrew Hauser described the current mix of high inflation, low growth, and rising unemployment as a nightmare for a central banker. This environment creates difficult choices for the government.

Chalmers told Politico that the pressures on people are very substantial and keep him awake at night. He noted that some causes lie beyond Canberra's control. He stated that the government is hostage to decisions taken in Washington, Tehran, or Eastern Europe regarding two wars that are pushing up global inflation and weighing on growth.

Domestic factors also complicate the situation. High government spending works against the fight against inflation, a point the opposition raises frequently. Productivity growth is low, meaning the economy reaches its speed limit sooner. This dynamic leads to higher inflation at lower rates of growth.

The government has two main options to ease voter discontent, each with a cost. It could cut the fuel excise tax again to lower petrol prices. This would put billions of dollars in motorists' pockets but make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in the December update. This would assist the central bank but weigh on an already weak economy and push unemployment higher. It is unclear if such cuts would earn the government credit.