Published 29 June 2026
The conflict in the Middle East has caused the greatest disruption to global energy markets in half a century. Since military actions began in late February approximately a fifth of world oil and gas supply has been trapped behind the Strait of Hormuz, while many petrochemical facilities in the Gulf region have suffered damage or interruptions. Despite many fitful attempts to resolve the conflict – the most recent being an initial US-Iran peace agreement on 18 June – energy supplies continue to be blocked and are likely to remain constrained for several months.
Australia’s economy is highly exposed to the energy crisis. We depend on imports for around 90% of our liquid fuels and petrochemical derivatives, which have previously been supplied by Asian refiners who rely on Middle East oil and gas. As these supply chains have been disrupted, Australia has had to look to alternate sources in Europe and the Americas to maintain energy security. Fuel and material shortages have thus far been prevented, but surging prices are imposing significant burdens on industry and households.
The initial impact was a sharp increase in fuel prices affecting both households and industry alike. But the effects extend beyond fuel, with spillovers emerging across industrial supply chains, business operations and the labour market. These broader impacts will have a long tail on the Australian economy which will persist for many months after the conflict resolves and energy supply patterns begin to normalise.
This research note examines how the global energy crisis has impacted on the Australian economy, and how its effects are likely to play out across the remainder of 2026. Utilising the most up-to-date economic indicators, it tracks crisis effects across energy prices, inflation, business activity, household spending and the labour market.
It finds that at time of writing (June 2026) the effects of the crisis are primarily inflationary, with high fuel prices imposing cost pressures on business and households. But second order effects – of broad-based and high inflation, lower investment and consumer spending, and ultimately a slowing economy – are visible on the horizon. Australia faces very challenging economic times until the conflict is resolved and energy markets normalise.
The initial impact of the crisis on the Australian economy came in the form of surging fuel prices. Australian fuel prices broadly track with global oil indices, which jumped from $65 to $110 a barrel in the early weeks of the conflict. This saw Australian wholesale petrol prices spike to $2.50 and diesel prices to $3.10 during the month of March, around double their pre-crisis levels.
This fuel price shock subsequently eased in April due to two forms of policy support. One was international, resulting from the release of emergency oil reserves by IEA members and China. These releases are temporarily substituting for much of the lost Middle East crude supply, lowering supply-side pressure on global prices. The second was local, with the federal government halving the rate of fuel excise between April and June as an emergency measure. These policy supports saw Australia petrol prices fall back to pre-conflict levels by June, while diesel prices stabilized at around 20% their pre-conflict levels.
The economic impacts of these prices rises have been concentrated on households and fuel-intensive industries. Households account for around a quarter of Australia’s fuel consumption, and faced a hit to spending power due to the rise in fuel prices. The remaining three quarters is used by industry, particularly transport (26% of national fuel use), mining (17%) and manufacturing and construction (8% each). Fuel is a major component of these industries’ cost structures, which have faced significant margin pressure as a result.
Despite the initial peace agreement signed between the US and Iran on 18 June, the outlook for Australian fuel prices remains highly uncertain. Emergency reserve releases cannot continue indefinitely, and best estimates suggest they will hit limits by August. Local fuel excise relief will taper to half its level in July then terminate in August, which will lead to a 20% price rise if further extensions are not announced. The fuel price outlook for the second half of 2026 depends on how quickly a durable resolution to the conflict which restores normal energy supplies if achieved. If this isn’t achieved by the middle of the third quarter, fuel prices are likely to increase again.
While much of the focus has on fuel prices, similar impacts have occurred across range of other commodities. Many industrial products are derived from petrochemicals and face identical disruptions to fuel markets from the sudden loss of Middle East oil and gas supply. Globally, impacts have been felt in four groups of petrochemical derivatives:
By sharing features with the fuels supply chain, these petrochemical derivatives have experienced similar market dynamics during the crisis. Prices spiked dramatically during March, with plastics rising around 40% and urea by 80%. Release of strategic fuel reserves from April similarly benefited the supply of derivates, with prices easing from the initial highs. Nonetheless their outlook is the same as fuel, with a cessation of the conflict and return to normal supply patterns needed by the third quarter to prevent another round of price rises and shortages.
For Australia, the economic impacts are magnified by high levels of dependence on imported petrochemical derivatives. Australia currently has no domestic urea production capacity, no primary plastics capacity outside polypropylene, and relies on imports for around 90% of the other derivatives. This renders the economy highly exposed to price rises and has forced industry to seek alternatives to conventional Asian suppliers which have been forced to curtail production. For the time being the principal impact has been rising prices for industrial users, with no shortages yet occurring. The future threat of shortages still exists depending on the path of conflict resolution and restoration of normal materials flows from Gulf region producers.
The immediate economic impact of the energy crisis has been a marked uptick in inflation. In March headline CPI jumped an astonishing 0.9% to 4.6% as fuel prices rose, before falling back to 4.0% in May as they eased. However, trimmed mean inflation increased to 3.6% in May, the highest level seen since 2024. This sudden burst of inflation was entirely due to the effect of fuel prices. When transport prices – the initial vector for fuel inflation – is excluded, CPI actually fell during the months of March and April. Were it not for the energy crisis, Australian inflation would be moderating back towards the RBA’s target band of 2-3%.
Importantly, this initial data is yet to show the full inflationary impact of the crisis. Current CPI data only includes the initial impacts on household consumption (such as fuel purchases, flights and other transport services). It does not yet include the impacts on industrial users (transport, manufacturing, construction and agriculture), which will take some months to be passed on via higher sales prices. As three quarters of Australia’s fuel is used in industry, the bulk of the pressure has yet to work its way through and become visible in the inflation data.
It is therefore highly likely that inflation will continue to rise over the coming months, even if energy markets normalised today. As industrial users recover rising fuel costs, the price of food, consumer goods, housing and any goods or servicing involving a transport component will also rise. Wage costs are also likely to increase as many wages are linked to CPI. These second and third order effects will magnify the impact of fuel price inflation, and leave a long tail of inflationary pressure for many months to come.
The Reserve Bank and Treasury have each attempted to forecast how this inflationary tail will play out. Their results are broadly congruent – predicting CPI will peak at around 5% in the middle of 2026, before taking a year to return back to normal levels by mid-2027. Critically, these forecasts are both premised on the assumption of an prompt cessation of the conflict and rapid normalisation of global energy markets. If that political outcome does not occur, inflation will peak higher and persist longer that in these base case forecasts.
While the full inflationary impacts of the crisis are yet to work through the economy, they are already having a negative effect across many branches of industry. The best source of insight comes from the ABS’ Business Conditions and Sentiments survey, which was reactivated in May to understand how businesses are adjusting to the shock. Amongst its initial findings are that:
However, these economy-wide figures obscure major differences at the industry level. A group of highly-impacted industries –agriculture, manufacturing, construction, retail, wholesale, transport and accommodation & food – report much higher impact rates. Amongst this group around three quarters of businesses indicated they had changed their operations, and a third had cut back on future investments. This reflects the fact these industries are more directly exposed to price rises for fuel and derivatives. Service industries are for the time less impacted.
Of particular concern is the data pointing to reduced investment intentions in highly-exposed industrial sectors. Investment is a leading indicator of economic activity, with capital expenditure decisions today creating demand for services and employment in future months. If investment intentions remain suppressed in future months, this will spill over into weaker business activity across other industries later in the year.
Household spending is also showing initial signs of stress. As the crisis has raises the price of fuel and related transport expenses it erodes purchasing power as income is redirected to higher fuel costs. This is evident in data on household spending, which in the months since the crisis show a decline in discretionary spending alongside a rise in essentials. This is consistent with households redirecting their spending towards fuel and transport services (in the essential category), at the cost of lower spending on discretionary consumer items.
This impact is likely to gather in strength over the coming months. As inflation rises towards a peak in mid-year the effect will be stronger, with an increasing share of household income being directed towards essentials. Households will also take some time to adjust their consumption patterns – initially absorbing the higher cost of fuel and essentials before slowing their spending as pressure on budgets gradually mount.
By contrast, the crisis is yet to have a material impact on the Australian labour market. Initial data shows that growth in employed persons has stalled since the crisis, while hours worked has been volatile but similarly shows no growth over the last three months. This has seen the unemployment rate increase only marginally – from 4.3% before the crisis to 4.4% in May– but do not yet signal a material weakening of the labour market.
However, this may shift in coming months. Employment is a lagging indicator of economic activity, which tends to move only after a change in business conditions. Employers take some time to adjust their workforce and are unlikely to have made changes within just a few months of the price shock. This explains why businesses are reporting much higher rates of deferred investment than employment reduction at this point in the cycle.
One indicator to consider is the accommodation & food industry, which reported a very high rate (33%) of employment reduction during May. Demand conditions in the industry are highly sensitive to consumer confidence and spending power, which has been impaired by the initial impacts of surging fuel prices. In an economic downturn, accommodation & food is usually one of the first industries to show signs of weakness. If inflationary pressures grow as expected, this may spread to other consumer-oriented industries such as retail.
Where does this leave the outlook for the Australian economy over the remainder of 2026? The RBA’s Statement on Monetary Policy in May contained the first and arguably best forecasts that take into consideration the impacts of the energy crisis. Noting the significant political and market uncertainty, they outline a noticeably weaker outlook for the Australian economy over the next two years compared with earlier projections.
The RBA expects that:
It should be noted that these ‘base case’ forecasts assume global energy prices which begin to normalise in the second half of 2026 – in effect, an assumption of a prompt end to the underlying conflict and rapid restoration of supply. The RBA also countenances an alternate scenario where this does not occur, which sees inflation rise into the mid-5s and economic growth falls close towards recessionary conditions. Geopolitics is impossible to forecast, but the risk clearly remains toward worse economic outcomes if diplomatic solutions continue to prove elusive.
Overall, these forecasts describe a ‘stagflationary’ environment – where inflation is rising while economic activity slows. This is a very challenging set of economic circumstances to navigate. Businesses have less scope to pass on rising costs when markets are softening, imposing pressure on margins that can suppress investment. Household real incomes fall with high inflation, while confidence also falls due to poor economic conditions. The RBA faces an invidious choice for monetary policy, caught between the imperative to control inflation and the need to protect the economy. Difficult times clearly lie ahead.
Jeffrey Wilson is Head of Research and Economics at Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
