If the US-Iran war reignites, how badly could Australia be impacted?

In brief

An interim ceasefire between Iran and the US softened previously dire forecasts about the war's economic impacts.

However, renewed fighting has raised questions about the impact of a prolonged conflict on Australia's economy.

A recent escalation in fighting between the United States and Iran has once again raised the spectre of widespread economic pain.

Since late February, disruptions to shipping routes have led oil prices to skyrocket, triggering fears that a prolonged conflict could plunge much of the world into recession.

However, since an interim ceasefire was formalised with a memorandum of understanding in June, international oil prices have fallen back to pre-war levels.

For a time, it seemed as if economic fallout from the conflict could be more limited than initially feared.

Commonwealth Bank head of Australian economics Belinda Allen wrote in a 6 July research note that the impact of the war in Iran was "less severe than we originally expected".

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Several days later, the bank's head of geoeconomics, Joe Capurso, said he too had expected oil prices to stay elevated for longer, but "they've come back down to pre-war levels very fast".

However, renewed fighting and statements made by political leaders in recent days have cast doubt on whether the ceasefire and easing of oil prices will hold.

On Wednesday, the US military launched fresh strikes on Iran, saying it was responding to Iranian attacks on commercial ships in the strategically vital Strait of Hormuz.

Declaring the ceasefire "over", US President Donald Trump said he would allow negotiations to continue, but added: "As far as I'm concerned, it's just a waste of time dealing with them".

Following that, Iran accused the US of violating the ceasefire deal and launched strikes on US military targets in the Gulf.

Optimism may have been 'premature'

Jessica Genauer, an international conflict expert at the University of New South Wales, said the tit-for-tat strikes suggest the MoU the countries signed on 17 June would not lead to a permanent peace.

"I think what we're going to be looking at is a sort of a middle path," she told SBS News.

"I don't think that we're going to return to the full-scale war that we saw from the 28th of February until the 8th of April, but I also don't think that we're now on a path towards a really substantial peace that involves a more significant agreement between Iran and the US."

She said optimism in the markets following the agreement was "probably a little premature".

"I think that in Australia we're relatively resilient and robust, but we will start to see some costs and consequences from the fact that this war is not over."

She said that, given the current impasse between the two sides, the cycle of back-and-forth strikes is likely to continue.

"I could see that continuing for at least a number of months, if not longer," she said.

How could Australia be affected if conflict persists?

Independent economist Saul Eslake said Australia had so far avoided the worst economic consequences of the war partly because oil prices didn't climb as high as many had feared.

He said US and Chinese oil reserves acted as a shock absorber, helping to limit the rise in global prices.

When the war disrupted global oil flows, the US increased oil exports from its strategic reserves, while China imported significantly less, leaning on its vast stockpiles.

"Through those two channels, much of the disruption to the supply of oil globally was actually offset," Eslake told SBS News.

However, he cautioned that the US and China would not be able to sustain that response indefinitely.

"If the conflict were to re-emerge and continue for a long time, then maybe we would see bigger and more sustained increases in oil prices," he said.

He said the Australian government's interventions had also helped shield the country from supply chain disruptions and larger shocks at the bowser — and many of those measures could be deployed again if the conflict continues.

When Iran had effectively blocked the Strait of Hormuz earlier this year, there were concerns about disruptions not only to oil shipments, but also to plastic and fertiliser supplies and the potential flow-on effects for Australia's food system.

In response, the Australian government worked with Asian regional partners to shore up fuel and fertiliser supplies and cut the fuel excise, a federal tax levied on petrol.

A more sustained, serious conflict could have "serious consequences" for Australia if oil supply to Asian countries is significantly disrupted, Eslake said.

However, Eslake doesn't believe renewed fighting on its own is likely to tip Australia towards a recession.

The greater risk, he argued, was that persistently high inflation could force the Reserve Bank of Australia to keep interest rates higher for longer.

"Probably the bigger risks of recession in Australia might be if inflation remains above the Reserve Bank's target and the Reserve Bank feels obliged to continue lifting interest rates," he said.

"That's probably, I think, a bigger risk than another eruption of sustained high oil prices."

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