Oil Price Shocks and Their Impact on the Australian Economy

Oil Price Shocks The Hidden Risk in Australia’s Economy

For a country that is so rich in resources, it is hard to believe that Australia still imports 90% of its liquid fuel.

That leaves us as one of the most exposed countries to oil price spikes. And any Australian who has filled up recently has felt how fast those price moves can hit. We are still at the mercy of global conflicts, regardless of our own production levels.

Australia produces around 350,000 barrels of oil per day domestically, but that has very little direct impact on what we pay at the pump.

So investors might ask, if we produce that much oil, why are we not benefiting more from our own supply?

This is where Australia’s shrinking refining infrastructure becomes a major issue. Back in 2010, Australia had 8 refineries. Now we have just 2.

That means much of the oil we produce is exported to be refined, and then we buy it back in refined form.

That creates another layer of vulnerability.

We are not just exposed to crude oil prices.

We are exposed to refining capacity, supply chain bottlenecks, and geopolitical disruption across the entire energy chain.

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Australia’s Refining Decline Is a National Portfolio Risk

What is interesting is that when oil prices rise, Australia does get some offset through higher LNG export revenues. That is the theory, at least. When global energy prices rise, our export earnings can rise too, which helps soften some of the damage from higher import costs.

But that does not mean households are protected. Higher oil prices still flow through to inflation, disposable income gets squeezed, consumer spending slows, and when that happens, economic growth can weaken quickly.

That is why Australia is so sensitive to energy shocks. Goldman Sachs estimates that for every US$10 rise in oil prices, Australia’s economic growth is reduced by 0.24% each year. In the US, the impact is only around 0.1 percentage points. So we are dealing with almost double the sensitivity to oil price surges.

And the effect is not just theoretical. It is immediate and measurable. Recent scenarios show that a one-month disruption to supply through the Strait of Hormuz could lift Australia’s CPI by around 1 percentage point, while GDP growth would be about 0.2 percentage points lower. A more severe three-month disruption could see CPI temporarily spike by around 1.5 percentage points at its peak, with GDP 0.5 percentage points lower by the end of 2026.

So how would this impact your portfolio?

First, it depends on what you own. But if we start with risk assets, a temporary spike in inflation can quickly change the picture.

If inflation rises, the market may start pricing in the risk of another rate hike. That pushes up the risk premium, lifts the cost of debt, and makes investors less willing to take on speculative assets.

That is usually where small-cap, high-risk companies start to underperform.

How severe that underperformance is depends on how long the oil spike lasts and whether inflation proves temporary or more persistent.

Freight and logistics companies also tend to feel the pressure in the near term. Higher fuel prices take up a larger share of operating costs, which can squeeze margins and weaken earnings.

That is particularly relevant for businesses exposed to transport and distribution, such as airlines, Linfox, and Toll Group.

Oil and gas companies, on the other hand, can benefit from higher prices through stronger margins and cash flow.

But even there, it is not a free pass.

If higher oil prices start pushing the economy toward stagflation, where prices rise but growth slows, demand can weaken over time.

So while oil and gas producers like Woodside may benefit initially, the broader macro backdrop can still become more challenging if economic activity starts to roll over.