Australia Faces Serious Concerns Over War's Potential Impact, Experts Warn

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Think petrol prices are bad now? It’s entirely possible you ain’t seen nothing yet, if a worse-(but not worst)-case scenario plays out in the war in Iran.

Westpac has updated its modelling on the economic impacts brought about by the conflict, particularly on energy costs.

The big four bank’s baseline â the scenario it thinks is most likely to play out â is the war lasts about a month, but that shipping through the Strait of Hormuz takes a further month to normalise.

Westpac has released new modelling on the economic impacts of the war in Iran. (Getty)

Westpac Bank has projected a significant uptick in oil prices, potentially reaching $110 per barrel, though the average is expected to balance out at $90 between April and June. This surge is anticipated to trigger a ripple effect, influencing Australian motorists at the pump and slightly denting economic growth by 0.1 percentage points.

Sian Fenner, the head of business and industry economics at Westpac, highlighted that the increase in petrol and diesel costs is likely to surpass the direct correlation with crude oil prices. “We foresee retail petrol and diesel prices averaging approximately $2.02 per litre and $2.50 per litre, respectively,” she explained.

Adding to the economic strain, the cost of essential goods like fertilizers, such as urea, has seen a sharp rise. The aviation industry is also feeling the pinch, with several airlines already implementing fare hikes as a response to escalating jet fuel prices.

Fenner also warned of the substantial risk of a more prolonged and severe disruption. Westpac’s contingency planning now contemplates the conflict extending for three months, a scenario that could lead to even more severe economic consequences.

“Fertiliser prices such as urea are also up sharply and some airlines have already announced price increases due to the rise in jet fuel.”

Considering Australian petrol and diesel prices already averaged 219.5 and 245.6 cents a litre last week, and Brent crude is currently sitting above $US100 a barrel, that appears to be a relatively sedate impact on the economy for what the International Energy Agency has labelled the worst oil supply shock in global history.

Customers fill their vehicles at the 7 Eleven Mobil petrol station on Liverpool Road in Ashfield, NSW. — Petrol prices have already surged to multi-year highs. (Kate Geraghty)

However, there is significant uncertainty about how long the war will last, with US President Donald Trump’s erratic statements about a timeframe, and his boasting that the conflict is won while demanding help from allies to open the Strait of Hormuz, doing nothing to quell market volatility.

Fenner said there “remains a material risk of a more extensive and prolonged disruption”, and Westpac’s alternative scenario now has the conflict lasting three months.

In such a case, the economic impact would be far worse.

Oil prices would average $US130 a barrel in the second quarter of the year, and at their peak would hit $US200.

Flames rise from an oil storage facility south of the capital Tehran as strikes hit the city during the U.S.Israel military campaign, Iran, Saturday, March 7, 2026. — Energy infrastructure has been struck across the Middle East during the war. (AP Photo/Vahid Salemi)

Given Australian petrol prices rise about 1 cent per litre for every dollar oil increases by, drivers could end up being slugged more than $3 a litre in the coming months.

Underlying inflation would also remain above the Reserve Bank’s target until well into 2027, and half a percentage point would be lopped off Australia’s overall economic growth.

In a sobering end to her research note, Fenner said the turmoil could be even worse if energy infrastructure suffers permanent damage.

“This (alternative) scenario assumes no significant damage to oil and LNG production and freight facilities,” she wrote.

“A permanent loss of supply would prolong the cost to the real economy.Â

“It would also add to the risk of a sell-off in financial markets that would not only amplify the negative shock to the global economy but complicate the policy response.”

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