Another oil shock is here

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Carrington Clarke (0:38)

Is another oil shock about to shock us? Brent crude is back above 100 US dollars a barrel with now a second critical global energy choke point looking decidedly vulnerable. And when we come back home, we face our own wicked problem. The Reserve Bank says inflation is still Australia's biggest economic concern. But some of the pressures pushing prices higher like the oil cost going up again are coming from things Australian interest rates don't impact. So how dangerous is this latest oil spike? And are borrowers being asked to carry the cost of inflation that they didn't create and nor that they can impact? Welcome to ABC Business Daily.

I'm Carrington Clarke.

Michael Janda (1:21)

And I'm the ABC's business editor, Michael Janda.

Carrington Clarke (1:24)

Michael, nice to see you again. I've spent one week away, a few things.

Michael Janda (1:28)

We kept the chair warm for you again, Manlin.

Carrington Clarke (1:31)

It's feeling very comfortable here. A few things happened. Stock market sell-off last week.

Michael Janda (1:37)

Well-flagged by our guest, Satyajit Das, last Monday, who warned that we might be in a bubble. He thinks it might take a year or two to really blow up, but maybe a taste of things ahead with what's happened.

Carrington Clarke (1:48)

Yeah, potentially. It does feel a little bit like a sense of deja vu though. It's oil once again above $100 a barrel.

Remembering The Reserve Bank when it was looking at forecasting this year, this is their best of the worst-case scenario, but it's pushing up there once again. The high point, remember, was about $126 a barrel earlier on in the war. But there are real concerns. Goldman Sachs predicting it could be pushing above $120.

Michael Janda (2:13)

I've seen forecasts from RBC Halima Croft, one of the better-known global commodity strategists, and she's saying their Q4 fourth-quarter high case of $121 a barrel for Brent is looking increasingly likely with these developments.

Carrington Clarke (2:29)

Let's look at what the latest developments are. We have been very focused on the Strait of Hormuz. I mean, I don't think anyone outside maybe commodities traders knew the name of this strait before the beginning of this conflict, and we repeat it on a daily basis now. But it's actually now the Red Sea that's perhaps even more critical to this latest spike in oil prices, and that's because we've seen the targeting of the East-West pipeline in Saudi Arabia. It appears to be drones originating in Iraq. Iraq says it's now investigating exactly who is responsible for this.

So we'll see where those investigations lead. But obviously, potentially benefits Iran, again, putting pressure on some of its neighbors and showing perhaps that it has the capability to reach them from even outside its own borders, but we wait to see. But why this is so important is that this pipeline has helped to alleviate some of the supply issues because the Strait of Hormuz has been so badly impacted by Iran's targeting of ships passing through that strait and it has meant that there's been more supply going into the global economy than would otherwise be the case. But now it's shut.

Michael Janda (3:36)

It's been a bit of a release fail for some of the pressure. It's interesting. Commonwealth Bank analysts over the past couple of weeks have done some research estimating that due to a drop in demand in China, increasing electrification, sourcing fuel and crude oil from other areas, that perhaps the world can get by without raiding its inventories with just 40-50 percent of the pre-war output from the Strait of Hormuz and the Persian Gulf. Because also we were in a global oil oversupply, which was why oil prices were below 70 US dollars a barrel coming into the war. What the East-West pipeline has done is allow four to five million barrels a day to go from the Persian Gulf across to the Red Sea, and much of that coming out through the Bab-el-Mandeb Strait and directly to Asia.

When you think about it, 20 million barrels roughly have output pre-war from the Gulf region.