The government's annual budget papers include a Treasury scenario in which a deepening and prolonged conflict in Iran could lift global oil prices to $200 per barrel and precipitate serious economic consequences for Australia and the wider world.
The analysis, published in the budget documentation on Tuesday, identifies pathways by which the conflict might damage energy and export infrastructure across the Middle East, including disruption to flows through the Red Sea trade route. In that event, oil supplies from the region could be effectively cut off, the Treasury warned.
Under the hypothetical laid out by Treasury, crude oil reaching $200 per barrel during the July-to-September quarter would be sufficient to see the Australian economy contract in that quarter. The modelling projects domestic inflation would accelerate to 7.25% in the year through the fourth quarter, accompanied by rising unemployment.
The report emphasises how higher input costs for fuel, fertilizer and other petrochemicals would pressure business viability and squeeze margins across affected sectors. It also notes that some firms could be pushed into unviability while others would see margins materially reduced by the spike in commodity prices.
Shipping traffic through the Strait of Hormuz remained halted on Tuesday, and oil moved higher after President Donald Trump rejected Iran's latest offer and suggested a ceasefire might not hold. Brent crude rose 2% to trade above $106 per barrel.
Treasurer Jim Chalmers told reporters on Tuesday: "We're hostage to developments in lots of ways. The impacts of the war in the Middle East are already serious. There is still a risk that they become quite severe and we've tried to give you a sense of that severity."
The Treasury also recognised offsetting effects for some parts of the Australian economy. A prolonged conflict would lift prices for Australian coal and LNG exports, providing some support to national income even as domestic costs rise.
The government's central forecast assumes inflation peaks in the three months through June and then eases as the conflict winds down. Chalmers cautioned that that outlook is "heavily dependent, heavily hostage to developments overseas for obvious reasons, including the duration of the conflict." The Treasury document frames the $200-per-barrel scenario as one severe but plausible outcome if disruptions are sustained.
Overall, the budget papers present the scenario as a reminder of the economy's exposure to global geopolitical shocks and the potential for such shocks to reverse near-term growth and inflation trajectories if they significantly disrupt energy supply routes.