How dangerous it may get: Flights, groceries, petrol – you title it, they are going up in value. PVO on financial blow looming because of Iran battle

Today the ASX plunged four per cent, wiping $130billion off its value. It’s on track for its worst daily sell off since the fallout from Donald Trump‘s so-called Liberation Day tariffs last year.

But wait, there’s more, because the situation we are now in is very different.

Crude oil has surged more than 15 per cent and pushed past $US112 a barrel. Wall Street had already been rattled by weak US jobs figures, and the Australian dollar has also slipped.

Markets are doing what they do when a geopolitical crisis stops looking containable and starts showing signs of being economically contagious.

The markets are pricing in the risks, and they are doing so quickly.

The temptation in Australia is to treat a Middle East war as a tragic, albeit distant event. Something to be watched through the lens of diplomacy and defence rather than the economic vulnerability it might cause here at home.

However, the Iran war is now threatening one of the world’s most important energy choke points, the Strait of Hormuz. A fifth of global crude and natural gas supply has already been suspended, while oil prices have jumped 20 per cent in response, as the market prices in tighter supply and prolonged disruptions.

The issue is no longer whether this is bad for the global economy. The question now is: how bad will it get?

Thick black clouds of smoke and acid rain have dwarfed Tehran after the destruction of a number of oil depots 

Petrol prices have surged across Australia in the wake of the US-Israeli conflict with Iran 

Today isn’t just bad for investors. It’s the first broadly based market acknowledgement that the economic fallout could be much larger than the political class wants to admit.

High energy prices act like a tax on growth. They hit households filling up their cars, businesses running freight fleets and airlines buying jet fuel. Not to mention the impacts on the mining and farming sectors.

The challenges high energy prices pose move through the whole economy. They don’t start and end at the petrol bowser.

The jet fuel price is the canary in the coal mine for what comes next. Singapore’s jet fuel prices rocketed by a whopping 72 per cent in just one day, and are up 140 per cent since late February.

Australia is especially exposed because we remain complacent about how dependent we are on imported liquid fuel. Did you know Australia only ever has two weeks’ worth of jet fuel reserves? 

That’s even less than our limited petrol and diesel reserves, which have kept coming down in recent years. How are our jet fuel reserves looking now?

Australia imports about 90 per cent of its liquid fuel. So when global energy markets seize up, we are in trouble, hostage to shipping lanes, insurance costs, refinery bottlenecks and what happens to the US dollar. The Australian dollar fell more than 0.6 per cent as the US dollar surged on safe haven demand.

Australian consumers get hit twice: first by a higher oil price, then by a weaker currency when buying.

The cost of jet fuel is skyrocketing – and you can bet your bottom dollar it will be reflected in the price of plane tickets

The fuel price surge has a knock-on effects – including hitting grocery shoppers, above 

The world economy was already brittle before the Iran conflict. The US jobs report unexpectedly revealed employers shedding jobs last month, as unemployment rose to 4.4 per cent.

If growth is slowing and unemployment is rising, central banks would normally cut rates. However, if inflation is being reignited by rising energy prices, which it is, they are more likely to hesitate.

That matters here because Australia had not exactly finished the inflation fight Treasurer Jim Chalmers promised was over before the Iran conflict began. Our inflation was already a problem and interest rates had already risen.

The RBA Governor Michele Bullock has warned that while Australia has some buffer in being a net energy exporter, a prolonged rise in global energy prices would weigh on consumer demand and economic growth, while also putting upward pressure on inflation.

In other words, even the RBA is intimating that if this war drags on, there is no free pass for Australia. Being a big energy exporter on paper doesn’t magically stop families paying more for petrol, flights and groceries.

The broader calamity isn’t a dramatic overnight collapse. It’s the cumulative squeeze coming our way. What began as a war-driven energy shock is at risk of becoming a wider slowdown with inflation still embedded.

There are, of course, other factors at play. The war involving Iran is not arriving in a strong, resilient global economy with plenty of policy flexibility. Countries are already carrying too much debt with too much spending.

Maybe this crisis ends quickly. But that’s not the scenario markets are pricing in anymore, and it’s certainly not the scenario lazy policy makers should bet on.

Markets have moved faster than governments because they don’t have the luxury of denial. They price risk in immediately. Politicians prefer to talk as though every crisis is temporary, until the public starts feeling it in their weekly budgets.