The recent attacks on Iran's oil facilities, believed to be part of the escalating conflict between Israel and Iran, have significant implications for global energy security. While the extent of the physical damage is still being determined, the broader effects are already being felt in global oil markets. Concerns about supply security and potential inflationary consequences are widespread.

The global impact

Iran, holding around 9% of the world's proven oil reserves, exports between 1.5 and 2 million barrels per day, mainly to China, despite enduring U.S. sanctions. Although its oil production is not as interconnected globally as that of Saudi Arabia or the UAE, any disruption to Iranian production or export routes, particularly the vital Strait of Hormuz, poses a systemic risk.

Market reactions have been swift, with Brent crude prices rising over 6% and West Texas Intermediate prices increasing by more than 5% immediately after the attacks. These price hikes reflect both short-term supply concerns and the addition of a geopolitical risk premium due to fears of a broader regional conflict.

Analysts anticipate that Australian petrol prices will rise in the coming weeks as domestic fuel costs react to international benchmarks with a delay.

Escalation and strategic intentions

There is growing apprehension that the conflict could escalate further, with Israel potentially intensifying its targeting of Iranian oil facilities to weaken Iran's economic capacity and deter proxy activities. Such actions would likely drive global oil prices even higher, especially if Iranian retaliations disrupt shipping routes or impact neighboring producers.

Countries most affected

Countries heavily reliant on oil imports, particularly in Asia, face the greatest vulnerability to short-term shocks. India, Pakistan, Indonesia, and Bangladesh, which heavily depend on Middle Eastern oil, are at risk of both supply interruptions and price hikes. These economies often lack strategic petroleum reserves and face external pressures when oil prices surge.

Despite being Iran's largest oil customer, China has more resilience due to diversified suppliers and substantial reserves. However, prolonged instability in the Persian Gulf could raise costs for Chinese refiners, particularly if the Strait of Hormuz becomes a contested area.

Australia's exposure

Australia does not directly import oil from Iran, sourcing most of its crude and refined products from countries like South Korea, Malaysia, the UAE, and Singapore. Nevertheless, Australian fuel prices are linked to international benchmarks such as Brent and Singapore Mogas, causing domestic prices to rise in response to global oil price hikes, regardless of Iranian oil processing in Australian refineries.

These price increases will have ripple effects, elevating transport and freight costs across various industries like agriculture, logistics, aviation, and construction. Higher operating expenses are likely to be passed on to consumers.

Broader economic impacts

The conflict could disrupt global shipping routes, especially if Iran retaliates through proxies by targeting vessels in the Red Sea, Arabian Sea, or the Hormuz Strait. Such disruptions could increase shipping insurance costs, delay deliveries, and exacerbate existing vulnerabilities in global supply chains, potentially reigniting inflationary pressures in many countries.

For Australia, higher household fuel costs could delay monetary easing by the Reserve Bank of Australia and reduce consumer confidence. Globally, central banks may adopt a more cautious approach to rate cuts if oil-driven inflation persists.

The attacks on Iran's oil fields and the potential for further escalation pose a renewed threat to global energy stability. Despite not importing Iranian oil, Australia remains exposed to price transmission, supply chain effects, and inflationary pressures. Strategic reserve management and diplomatic engagement will be crucial in mitigating the fallout.