Australia should brace for war impact to get worse, Treasury warns

Australia should brace for war impact to get worse, Treasury warns Tue 28 Jul 2026 at 5:01am In short: Treasury has warned Jim Chalmers that the economic risks from the continuation of the war in the Middle East are increasing. The government is yet to decide whether it will extend the fuel excise discount into August. What's next? The latest inflation figures are due on Wednesday, which will be the last release before the Reserve Bank board meets in August. The economic risks for Australia from the continuation of the Middle East war are increasing, the Treasury has warned, as the federal government weighs whether to extend subsidies for petrol and diesel into August. Oil prices have increased since the unravelling of a memorandum of understanding between the United States and Iran, with knock-on effects for Australian prices. Diesel, though below the peaks seen in late March, remains markedly above prewar prices across Australia. The same price comparison for petrol is more mixed, now below the prewar benchmark in Melbourne, Sydney and Brisbane but above it elsewhere. After halving the fuel excise and the heavy vehicle road-user charge for three months, the government extended a smaller discount of about 16 cents per litre for July, which ends on Sunday. Prime Minister Anthony Albanese and Treasurer Jim Chalmers have indicated that the relief will not last forever and that there are no plans to extend it into August, but have not ruled out doing so. Mr Chalmers said the government was "monitoring day-to-day developments very closely", adding that Australians "have already paid too hefty a price for this conflict on the other side of the world". "From an economic point of view, a proper and permanent end to the war can't come soon enough," he said. "The longer this drags out, the more serious the consequences for inflation and growth here and around the world." Oil market 'more vulnerable' now: Treasury In a briefing to Mr Chalmers the Treasury warned that the world had "weaker buffers" to absorb continuing disruptions to the oil supply. "During the initial phase of the conflict, the energy price shock, although significant, was contained … [including by] re-routing of exports, a drawdown in oil inventories, and some demand destruction," the briefing notes, seen by the ABC, stated. Treasury said this was in part because oil reserves around the world had already been depleted, and partly because of the spread of conflict to involve attacks by the Houthi militia in the Red Sea, which has been used as an alternative route to the Strait of Hormuz. Also cited was the knock-on effect of Ukrainian drone strikes on Russian oil refineries, leading to a ban on Russian diesel exports that has put further strain on global markets. "The oil market is now more vulnerable … These factors mean that crude oil prices are likely to remain elevated in the near-term. Upside risks to oil prices will build if the status quo persists … price pressures may intensify over coming months," the Treasury note said. Treasury also warned that a US ground operation in the Middle East would "represent a major escalation" and add to the risks. The May budget included a scenario in which oil prices peak at $US200 a barrel in September (roughly double their recent level), which would lead to peak headline inflation of about 7.25 per cent. The Australian Bureau of Statistics will release the latest monthly inflation figures on Wednesday, the last such release before the Reserve Bank board meets to consider interest rates on August 10 and 11. Economists regard a hike as a possibility. The federal government has been under pressure over Australia's stagnating economic performance and the persistence of elevated inflation, which its opponents argue has been worsened by the above-average level of government spending. Mr Chalmers has countered that much of the recent uptick in economic activity is driven by private sector investment, led by investment in data centres, and by the war, which he said posed "a substantial threat to inflation". Mr Albanese will appear alongside WA Premier Roger Cook on Tuesday to announced the commencement of investigations into a new oil refinery in Karratha, backed by a $4 million government feasibility study. "The longer war in the Middle East goes on the greater the impact on Australia will be, and my government will continue to do everything we can to shield Australia from the worst effects," he said in a statement.