Oil hits $113 as Australia cuts forecasts

The global benchmark price for oil reached US$113 a barrel overnight. This figure brings the market close to its April peak, which stood near US$120. For Australian drivers, the impact is immediate and tangible. They now pay 60 cents more per litre than they did before the United States and Israel launched attacks on Iran. This increase adds $36 to the cost of filling a standard 60-litre tank. A family that fills up weekly now spends $144 more per month compared to February.

Treasurer Jim Chalmers faces a difficult task in conveying this news to voters. Last week, he suggested the economy would be "a bit better" in a year. By Friday, he acknowledged that Treasury officials are lowering their forecasts. These changes will appear in the December mid-year budget update. The new projections point to slower growth and higher unemployment. Chalmers told Politico that the pressures on people are "very substantial," a comment that underscores the political strain.

The primary driver of this downturn is the widening conflict in the Middle East. Risk remains elevated. The New York Times reported that the US and Israel have drawn up plans to resume attacks on Iran after the American midterm elections. Analysts at Westpac outlined a scenario where oil prices head toward US$150. This potential spike echoes warnings issued by the International Monetary Fund earlier this month. Such an outcome would severely impact inflation and interest rates. A fifth rate rise is possible on 3 November.

Global economic supports are also weakening. Heavy spending on artificial intelligence has masked weakness in other sectors. However, investors are now uneasy about a sharp rise in corporate debt. Companies are borrowing heavily to build the necessary infrastructure for AI. This anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to datacentre construction could slow the rush. While this may be healthy long term, it adds to short-term stress. Talk of a tech stock bubble is increasingly paired with talk of a bust.

Reserve Bank Governor Andrew Hauser described the combination of high inflation, low growth, and rising unemployment as a central banker's "nightmare." It is also a difficult position for Chalmers, who is increasingly unpopular. He noted that some causes lie beyond Canberra's control. The government can influence factors like cost-of-living help and budget management. However, Chalmers said Australia is "hostage as well" to decisions taken in Washington, Tehran, and Eastern Europe. These regions are involved in two wars that push up global inflation and weigh on growth.

Domestic factors are not helping the situation. High government spending works against the fight against inflation. This is a point the opposition raises frequently. Productivity growth is resting, meaning the economy reaches its speed limit sooner. Inflation runs higher at lower rates of growth. Chalmers is correct that much is out of the government's hands. His options for easing voter discontent are limited and carry costs.

The government could cut the fuel excise again on a temporary basis. This would lower petrol prices and put billions of dollars in motorists' pockets. However, it would 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. It would also push unemployment higher. It is unclear if such cuts would earn the government credit.

Hauser has called this a "world of hard choices," where fixing one problem worsens another. Australians are becoming familiar with this dynamic. The government must decide whether to ease immediate costs or protect long-term stability. The next move will likely come in the December budget update. Until then, the cost of living remains high and growth remains slow.