What the Israel-Iran war means for oil prices and the cost of goods

Australia Broadcast Center

4 hours ago

As Israel and Iran, now joined by the US, escalate from conflict to war, the price of oil is rising.
Energy and fuel costs, food prices, and spending on infrastructure and welfare programs will likely be affected, says a leading economics researcher.
This means higher prices for consumers across Asia.
For Asian nations, there is no real alternative to oil from the Gulf states, meaning volatility in that region is likely to cause pressure thousands of kilometres away.
Indo-Pacific countries who rely on oil imports would have to spend more, but many do not have the resources to keep borrowing without cutting spending in other areas," said Joaquin Vespignani, associate professor in finance at the University of Tasmania.
"For the average person ... inflation will increase significantly, while income may decline. So, you have a double whammy there,' he said.
Prices have already increased 3 per cent following the US's bombing of an Iranian nuclear site.
A squeeze on oil supplies could have serious ramifications for countries such as Indonesia which have provided fuel subsidies. ( Reuters: Ajeng Dinar Ulfiana )
Are oil prices likely to rise more?
Yes, according to Dr Vespignani. In the initial stages of the Israel-Iran war, markets reacted with a 5 per cent "risk premium", he said.
'Forecasts under high-risk scenarios suggest Brent could exceed $US100 per barrel if supply from Iran is disrupted and strategic transport routes are compromised.
'If the United States becomes further involved, especially through direct engagement or enhanced sanctions on Iranian crude exports, we could see a significant and sustained rise in oil prices into 2025.''
How will that affect the Indo-Pacific?
'The impact could be very significant,'' said Dr Vespignani. 'India, Indonesia, and most Southeast Asian nations are highly dependent on imported oil, much of it sourced from the Middle East.''
India imports about 85 per cent of its crude oil, Indonesia imports about 60 per cent, and Southeast Asia imports more than 70 per cent. Countries like Thailand, the Philippines and Vietnam are heavily exposed to price increases.
'If prices rise by $US10–20/barrel over a sustained period, this would widen current account deficits, increase fuel subsidies, and feed into broader inflation,' said Dr Vespignani.
Joaquin Vespignani said the Indo-Pacific would be significantly affected by any price rises or interruption to supplies from the oil-producing Gulf states. ( Supplied )
In India, for example, a 25 per cent increase in global oil prices would raise its oil import bill by an estimated $US30–40 billion annually, placing substantial pressure on the current account deficit, the rupee and domestic inflation.
Indonesia would face similar pressure.
The burden on the state budget due to fuel subsidies could substantially increase the deficit or force a reallocation of spending from infrastructure and welfare programs.
Dr Vespignani said countries with little room to move with finances and external vulnerabilities would be forced to choose between inflation control, currency stability, and managing sustainable debt.
'[This] could also slow economic growth, reduce disposable incomes, and create new pressures on government finances — particularly in economies still recovering from COVID-19 and global food price inflation,' he said.
Oil tankers pass through the Strait of Hormuz ( Reuters: Hamad I Mohammed )
What happens if Iran blocks the Strait of Hormuz?
Iran has approved a move to close the Strait of Hormuz, which still requires sign off from the Supreme National Security Council, a body led by an appointee of Ali Khamenei.
The step is widely seen as Iran's most effective threat to hurt the West.
The Strait of Hormuz is the world's most critical oil chokepoint — about 20 per cent of global oil flows pass through it. Analysts agree if Iran were to block or significantly restrict shipping, the immediate result would be a major supply shock.
The price of crude oil could surge well above $US90–105 per barrel depending on the duration and severity of the blockade, said Dr Vespignani.
'India, Indonesia, and most Southeast Asian countries would be among the hardest hit due to their geographic proximity and trade links to Gulf producers,' he said.
'Refiners in these countries would face delays, higher freight and insurance costs, and ultimately be forced to pass on costs to consumers.''
Any squeeze on oil supplies would mean 'higher costs for fuel, electricity, and transport — with downstream effects on food and manufacturing prices.''
Are there alternatives to Middle East oil?
'There are no immediate short-term alternatives that can fully offset a severe supply disruption,' said Dr Vespignani.
He said strategic reserves can provide some buffer but these are relatively small and would only cover a few weeks of demand.
'In the absence of substitution options, higher prices will be required to reduce demand — potentially weakening growth and amplifying inflation pressures across the Indo-Pacific.''