Oil Prices Could Push Australia’s Inflation Up One Full Point
Synopsis
Upward pressure on global oil prices from conflict in the Middle East could push Australia’s inflation up a full percentage point if the crisis deepens. Australia imports about 90 per cent of its fuel and has the lowest reserves of any IEA nation, just 48 days’ worth. For Canadian consumers, that is an increase of about 10 cents a litre for every US$10 increase in oil. A single-month supply disruption through the Strait of Hormuz would raise the Australian CPI by around 1%. The RBA has also increased rates once in 2026 and is monitoring fuel prices and inflation very closely with risks continuing to mount.
The Middle East crisis could push up Australia’s inflation by a full percentage point as oil prices rise. Australia depends on imported fuels for 90% of its consumption, and has only 48 days’ worth of reserves, making it a high-risk target.
Highlights
- Rising global oil prices will add one percentage point to Australia’s inflation if the conflict escalates.
- Australia imports more than 90% of its fuel, and has just 48 days of reserves on hand, the fewest of any IEA country.
- Each US$10 increase in oil prices puts another 10 cents per litre on Australian fuel prices at the bowser.
- A month-long supply blockade through the Straits of Hormuz could raise Australia’s CPI by ~1%.
Australia's Inflation Could Increase a Full Point From Oil Prices
Oil prices breached US$100 a barrel on March 9 for the first time in nearly four years as continuing conflict between the US, Israel and Iran continued to drive global energy markets higher. That is a figure for Australia not to overlook. Every US$10 increase in oil prices adds about 10 cents a litre to the Australian pump price. Transport and logistics costs also rise and those increased costs percolate into the wider price level over time.
Economic modelling suggests that a month-long disruption to supply through the Strait of Hormuz could elevate Australia’s CPI by around 1 percentage point, whilst trimming GDP growth by about 0.2% points. In a more severe three-month disruption, CPI could temporarily increase at its peak by about 1.5% points, and GDP would be 0.5% points lower at the end of 2026. On top of that inflation is already running at 3.8%, well above the RBA’s target range of 2 to 3%.
Australia Derives Nearly All Its Fuel From Abroad
Australia has domestic production of about 350,000 barrels a day of oil, but this has little direct bearing on what people pay at the pump. Australia has dwindled down to 2 refineries from eight in 2010, so much of the oil it produces is sent for refining and purchased again in refined form. This arrangement makes Australia more subject to global oil fluctuations than many may realise.
Australia only has 48 days of total fuel coverage. The International Energy Agency mandates that member countries have 90 days of reserves. Australia ranks last of the 27 net oil-importing IEA member nations. The typical reserve of other nations is 141 days. That gap is a big deal at this moment. If the Strait of Hormuz remains disrupted for weeks, Australia has little buffer to call upon before what we feel at the pump becomes much more serious across the entire economy.
RBA Is Observant, But Lacks Options
Oil-driven inflation is a very hard problem for central banks. Interest rates can’t affect oil supply. Unlike demand-driven inflation, which can be damped with higher interest rates if consumers spend freely, supply-driven inflation is attributable to increasing costs of production. If central banks raise rates to control prices, they will risk slowing growth further. It is a hard line to walk and the RBA knows it.
The governor of the Reserve Bank of Australia noted that the supply shock could help drive inflation pressures but also warned that a long-lasting impact on energy markets could have a drag on global economic activity and put downward pressure on inflation. In other words, the RBA is watching two risks in tandem. It may be that all else being equal inflation goes up and growth goes down and this is the worst central bank combination there is and at this moment both are in play for just how long depending on how long the oil disruption lasts.
FAQs
- How much will oil prices add to inflation in Australia?
One month of supply disruption could contribute an additional 1% point increase in Australia’s CPI, and three months could push the peak to 1.5 points higher.
2. Why is Australia vulnerable to oil price increases?
Australia imports over 90% of its fuel, and has the least amount of fuel reserves of any net oil-importing IEA country with just 48 days’ worth.
3. How much does fuel rise at the pump when oil increases?
For every increase in the price of oil of US$10, Australians pay about 10 cents more per litre at the service station.
4. What is the RBAs response?
The RBA hiked once in 2026 and is leaning forward, but oil-related inflation is resistant to a solution via interest rates: rate increases cannot bring more oil into the market.
5. How high is inflation in Australia right now?
Australia’s annual inflation was at 3.8% in January 2026, well above the RBA’s target band of 2 to 3%, before the latest spike in oil prices.
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