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Iran has vowed to choke global shipping. That could push petrol to $2.50 a litre

By Mike Foley and Frances Howe

Australian petrol prices could hit $2.50 a litre while electricity and gas prices spike if Iran closes its shipping channels to the world, blocking the conduit for Middle Eastern energy exports representing about 20 per cent of globally traded oil and gas.

Iran’s parliament is reported to have agreed to close the Strait of Hormuz, but it is unclear if the nation’s military will implement a blockade, which could draw brutal retaliation from the US and its allies.

Iran’s parliament has voted to block shipping in the Strait of Hormuz.

Iran’s parliament has voted to block shipping in the Strait of Hormuz. Credit: Rob Homer

However, just the threat of global disruption can drive commodity prices higher. When Vladimir Putin invaded of Ukraine in 2022, fears over shortages due to widespread embargoes on Russia’s oil and gas exports helped drive price spikes along with the physical shortage of fuel.

Any shift in global markets will affect local energy prices because Australia imports the vast majority of its petroleum. Despite Australia being a major gas exporter, local gas prices are set by the international market because buyers here compete with the rest of the world.

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Schneider Electric senior director Lisa Zembrodt, who advises some of Australia’s biggest corporate energy users, said disruption to shipping through the Strait of Hormuz would affect 20 per cent of the world’s petroleum liquids consumption and 20 per cent of liquified natural gas. She said more than 80 per cent of these exports go to Asian markets, which drives prices in Australia.

“When the price of oil rises, we see this at the pump. When the international price of gas rises, the price of gas as a fuel for heating may rise, despite that we produce twice as much as we consume domestically. The cost of gas-fired generation can also rise, causing electricity prices to rise at times when gas is setting the price in the market – for example recently during the cold snap in Victoria.”

And while only around 10 per cent of Australia’s electricity is generated by gas, it is the most expensive compared to the dominant fuel sources of coal and renewable energy, which means it sets a benchmark price that drives all the others up if its price spikes.

The 2022 electricity crisis culminated in price spikes so high that the regulator imposed the first-ever suspension of the market, and bills have remained elevated ever since.

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Grattan Institute energy and climate change deputy program director Alison Reeve said it was impossible to say if Australia would see a repeat of similar disruptions, given the 2022 crisis was driven by both gas prices and a shortage of coal for power stations.

However, Reeve said once electricity markets had spiked it could take a long time to subside.

“It takes a while for that sort of price effect to flow through into the retail market, and then it takes a while to wash out again as well,” Reeve said.

University of NSW senior researcher Dylan McConnell said this was because electricity retailers, who sell power to households and small businesses, get their power from wholesalers via long-term contracts.

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“In 2022 we had rapid increases in wholesale electricity prices that took, many months, in fact, years for that to, to wash through to retail electricity prices,” McConnell said.

He said gas prices could have an outsized impact on retail electricity prices, even though the fuel is only used to generate about 8 per cent of electricity in the grid.

“Other generators shadow the gas price, so even if gas is not setting the price, it’s the competitive ceiling for it.”

The price of oil would also skyrocket if the Strait of Hormuz was blocked by Iran, which could push local petrol prices beyond $2 a litre.

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US Secretary of State Marco Rubio on Monday called on China to stop Iran shutting off the shipping channel in an interview with Fox News.

The global oil price has risen to more than $US80 ($124) a barrell, up from $US65 a fortnight ago.

AMP chief economist Shane Oliver said if the strait were to be blockaded the oil price could reach $US150 a barrel, raising local petrol prices by up to 70¢ a litre.

“We’d possibly, or quite probably see petrol prices rise to record highs,” Oliver said.

However, NRMA spokesperson Peter Khoury said prices were unlikely to hit the highs of 2022, when it took a range of factors to drive oil to $US133 a barrel.

“At the same time that Russia invaded Ukraine, the rest of the world put sanctions on Russia and Russian oil. And on top of that, we had the COVID-19 supply chain crisis that was already putting pressure on prices.

“A whole bunch of things we’ve never seen in our lifetime had to happen all at the same time in order to get to $US133 a barrel,” Khoury said.

Energy Minister Chris Bowen was contacted for comment.

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Original URL: https://www.theage.com.au/politics/federal/petrol-electricity-and-gas-price-spikes-inevitable-if-iran-chokes-shipping-20250623-p5m9hm.html