Chapter 1: What is the main topic discussed in this episode?
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More than three weeks after the initial strikes on Iran by Israel and the US started a war, world energy markets remain in turmoil. The Strait of Hormuz remains effectively closed. Oil prices have surged, with Australians paying more at the petrol pump. An ultimatum has been issued and we may be on the edge of another dangerous escalation. How vulnerable is the Australian economy?
And is there anything the government can do to protect the country? Welcome to ABC Business Daily. I'm Carrington Clarke.
And I'm ABC Business Editor Michael Yander.
Michael, thank you so much for being the first guest on this brand new podcast. It's a pleasure to be here, Carrington. Well, let's see how the rest of the episode goes. But so far, it is a pleasurable experience. It's not such a pleasurable experience, though. Is it for those people invested in the Australian stock market today?
No, and we'll see how big the falls end up being. But at its worst in the morning, the market was down about 2%. That actually pushed it past 10% down from the start of this month, which is what analysts call a correction when you have a fall from peak to trough of more than 10%. So that's a big decline. You usually get maybe one of those every year or two.
And with Donald Trump and his erratic policies, we've already had a couple over the past
And then I hinted at the ultimatum that as we record this podcast, we're kind of midway through Donald Trump's 48-hour deadline for Iran. Now, the Australian stock market has had this significant fall, but that's kind of in line with what we saw earlier. on Wall Street to end last week. So kind of before that ultimatum was issued. But it is hanging over the markets today, isn't it?
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Chapter 2: What triggered the recent escalation in the Middle East?
It's actually a very clear timeline. And he's asking for something very specific. Is there any chance that he backs down effectively from this ultimatum?
Well, it'd be pretty embarrassing if he backs away now having made the ultimatum. The Iranians so far look willing to call his bluff and say, well, look, if you do that and attack our energy electricity facilities, we're going to go even harder on the energy facilities in the Gulf. And that's already what's got markets really panicked.
That attack on Ras Laffan in Qatar is the thing that has more than anything else spooked investors because Qatar is like 20% of LNG supply globally coming out of those plants. And now 17% of that is going to be offline for between three and five years. So the whole plant's currently shut down during the war, which is a problem.
Chapter 3: How are global energy markets affected by the conflict?
But that's a temporary problem. But you've got a long-term problem where this energy infrastructure that can't just be turned back on or fixed overnight is now out of action for years. And that's going to bake in higher energy prices, not just this week at the pump, not just over the next few months, but potentially for the rest of this decade.
Yeah, and I think watching this now play out over the three weeks, there has been a noticeable shift, I think, to try to gauge the fear of investors about how prolonged this conflict would be. But I felt like last week also felt like a significant escalation in that we saw the
this strike by Israel on the South Pass gas field, which is so essential to the Iranian economy and so essential to their own electricity network. And then we saw, as you say, that retaliatory attack, including going after Ras Al-Fahm by the Iranians. And it seemed to show that they were willing to go tit for tat when it came to civilian infrastructure and that changes the calculation.
That is why we're seeing this sell-off at the end of last week in the US and we're seeing another sell-off and Japan was hit even harder in the morning when the Nikkei opened on Monday. It's because people aren't sure where the two parties are willing to stop. The lines in the sand keep being broken. When this conflict began, there were probably two hopes.
Chapter 4: What is the current state of the Australian economy amidst rising oil prices?
The first was Israel and the US were going after the leadership. They got the supreme leader. They got a number of other key targets in the regime, and it might just all be done. That didn't happen. Then the other off-ramp that investors were hoping for is the taco trade. Trump always chickens out. Well, so far he hasn't, and he's threatening to double down.
The Iranians have showed no signs at all of chickening out because they see this as existential.
Chapter 5: How vulnerable is Australia to international energy supply disruptions?
Analysts at the moment are being asked to almost be geopolitical experts, but the reason why this is hitting the stock market, why this is hitting the global economies, is around how critical these energy supplies are for the rest of the world. And Australia is in this kind of odd situation.
On one hand, we are a major exporter of energy, including liquefied natural gas, which actually means there are some winners on the Australian side. Those companies that are actually exporting our gas are getting much higher prices, but we are also heavily reliant on refined oil being imported from other countries. So this is playing out in different ways in the Australian economy.
And obviously, people who go and fill up a tank of fuel bear that cost directly. But there are some winners from this war on the Australian side.
Well, the problem, Carrington, as many people, particularly on the crossbenches and in the Greens, have pointed out is the big winners from the rising energy prices in Australia are ExxonMobil, Omobile, Chevron, Shell, Woodside Petroleum, Origin Energy, Santos. Some of those are Australian listed, but many of them are foreign completely or mostly foreign-owned multinationals.
The level of taxation on Australian gas exports is incredibly low. So the government's not getting massive tax increases from this rise in prices and therefore doesn't have the budget room to pass relief on to domestic consumers and industries without potentially stoking even more inflation. And that's why those calls for a gas tax have become louder again in the past week.
And we, of course, heard that the government has asked Treasury to model some options about taxing gas exports more because that would help soften this domestic blow of huge increases in liquid fuel prices and possibly the flow-on impact to higher consumer prices because of rising transport costs, supply shortages, potentially even rising electricity prices again if gas prices domestically start going up.
Yeah, and heading into this budget season, there was speculation about where the government would go in terms of perhaps higher taxation, focus on the capital gains tax discount, whether or not that would be looked at. But it does seem to be one of these situations where a crisis has perhaps changed that narrative.
And although the Labor government probably still has some scar tissue when it comes to its last attempt to tax the resources industry through a super profits tax, perhaps this time around when people are feeling the acute pain of going and filling up at the petrol bowser,
that actually they're more open to the idea, as you say, of taxing gas companies more so that the Australian public wins more. Now, we'll see how this plays out. We know that the resource industry knows how to fight a campaign and this could get messy.
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Chapter 6: What are the implications of the ultimatum issued by the US?
In some cases, it's just because they can't deliver what was originally promised. Pretty much all major contracts have that clause. And this is definitely an event outside of their control. So they're triggering these clauses. Prices will go up. They're already going up. My colleague Amelia Terzon from the business reporting team has just done a story today on building costs.
And there's already fuel surcharges coming through in the construction sector. So we saw in COVID how building prices rose. We're already seeing it again and we're only weeks into this energy crisis. And, you know, as we discussed earlier, it could go on months and the effects could last years if this energy infrastructure in the Middle East is seriously damaged.
One of the interesting things about those negotiations, because as you say, once if it's outside their control, a time of war, many of these contracts are able to be altered, is that Australia then needs to figure out, well, what leverage do we have? And one of the things that we do have as leverage, the card that we have to play, is that we are a major exporter of different types of energy.
And so when you're negotiating with places like South Korea or Malaysia, and you can say, well, we need access to refined fuel, you need access to LNG, that becomes part of that negotiation process. And I think that's now happening quite aggressively behind the scenes, and that might secure the position.
What is interesting, I think, as well, at the very start of this crisis, there was a lot of talk about Australia not meeting the International Energy Agency's standard of 90 days of fuel in reserve. Now, Australia has many different arguments about why we don't meet that, but one of them is that it comes at huge cost for
The government was saying about $20 billion to actually get that much fuel in Australia ready to be deployed in times of crisis. But I think this has raised the question about whether or not that $20 billion is insurance worth paying for, isn't it? Because we're now seeing that those those supply lines to Australia can be interrupted.
And this was one of the lessons from COVID, which we're still learning and now learning again, which is, you know, we'd focused on globalised supply chains just in time because it's the most efficient way to do things and that therefore generally the cheapest way to do things.
which is great when everything's working just fine, when there's no geopolitical tensions, when there's no great power rivalry with one of your major export destinations and also one of the major manufacturing hub in the world in China. But when you've got the two superpowers, China and the US, arguing with each other,
And this spills over into places like the Middle East, where there is some element of this China-US struggle feeding through into the US actions in Iran. Australia's just sitting on the sidelines and as the Canadian PM said, middle powers like us, unless we group together and do something about it, one of which would be supply chain security, we just end up being the collateral damage.
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Chapter 7: How are investors reacting to the ongoing conflict?
But Michael, thank you so much for joining us. A pleasure as always, Carrington. That's it for today's episode of ABC Business Daily. We'll be back with another episode tomorrow. Make sure you're following us on ABC Listen or wherever you get your podcasts. Just search and follow the ABC Business Daily feed. And we'd love to hear your questions.
If there's business or economic news that has you stumped, just like our Politics Now friends, Patricia Carvellis and Frank Kelly, we're also here to help unpack what you're hearing and reading. Just send in a question, preferably a voice note, to abcbusinessdaily at abc.net.au. Michael, catch you later. See you, Carrington.