How will the rising crude prices impact Australia and it's economy?

Team Veye | 24-Jun-2019 rising crude prices impact Australia

If Iran breaches a cap on its enriched-uranium stockpile anytime soon then it will be pushing its conflict with the U.S. into a dangerous new phase.

And as the standoff between US and Iran continues, President Donald Trump said Saturday he’ll impose “major” additional U.S. penalties on Monday. 

Major impact among all other things would be a substantial rise in crude prices as has already been witnessed in the days gone by.

How would it affect Australia and its population? 

Australians are largely urbanised with 66% of the population living in big cities along the south and east coast. The rural and remote parts of the country are very sparsely populated, and are highly dependent on oil for transport.

Australia is extremely "automobile-dependent”. Our cities and transport-intensive economy has been shaped by cheap oil. Subsidised freight transport centralises production at the expense of local industries. Even our supermarkets offer petrol discounts so that those without cars subsidise heavy fuel users through increased food prices.

Australia is a dry continent and its soils are generally nutrient deficient. Agriculture in Australia is dependent on increasing fertilizer inputs, mechanized farming and long distance transport. It is becoming a way of using land to convert petroleum into food. Australian farmers will be faced with reinventing their industry including returning to using natural nitrogen fixation with legumes.

The most direct impact of higher oil prices on households comes through the channel of higher petrol prices as the demand for oil remains relatively inelastic. Around 62% of people use a car to travel to work. If petrol prices remain at elevated levels we may see some impacts on housing spending patterns. Households are unlikely to cut down their rate of savings any further, particularly now dwelling prices are falling. So higher fuel bills are likely to be paid for by cut backs to spending on other goods and services.

Domestic gas prices have become increasingly linked to international prices in recent years. And electricity prices have become closely linked with domestic gas prices. But citing that same link between gas and oil prices — higher oil prices will provide a boost for the export component of GDP.

The surge in LNG production since late-2016 has seen Australia become a net exporter rather than a net importer, which means the dollar-value of our exports and terms of trade both stand to benefit if higher oil prices flow through to LNG.

In that scenario, the economy could also get a boost from further investment in LNG projects and higher government tax revenues.


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