Economic news continues to be dominated by the ongoing conflict in the Middle East which, at time of writing, remains unresolved. But even if the conflict was resolved immediately liquid fuel prices, and prices of fertiliser, are likely to remain elevated for an extended period—perhaps 2 to 3 years or more.

Every advanced economy has learnt from this crisis how easy it is for Iran to shut the Strait of Hormuz and thus strangle global energy supply. All it takes is the threat of a few low-cost capabilities like drones or fast-moving speedboats adapted for hostile intent. Building pipelines to circumvent transit through the Strait will take countries like Saudi Arabia around five years to build.

From an economic standpoint this implies that every petroleum importing country has realised they need to buy a lot more insurance against supply chain disruption. This involves having much larger reserves of petroleum, diesel, and aviation fuel.

Those countries that had larger strategic reserves have run them down during the current crisis. Those will need to be replenished. Not just back to pre-crisis levels, but to the higher levels now required. And countries that didn’t have large reserves, like Australia, will have to ensure that they increase theirs to significantly higher levels.

This all means that demand for petroleum products will remain at elevated levels for a considerable period. Even if supply were to be at pre-crisis levels prices will remain high. But supply could easily be lower. Qatar has already announced that the damage done to one of its oil and gas fields will take 3 to 5 years to repair, for instance.

Can supply be increased elsewhere? Maybe. But even if, say, the United States (the world’s largest oil producer) wanted to commence new oil rigs, the prices of the components to build those rigs has gone up thanks to President’s Trump’s tariffs. Perhaps other large producers like Russia, Saudi Arabia, and Canada can increase production significantly. But that remains to be seen. And on what timeframe?

Medium-term elevated liquid fuel and fertiliser prices will mean significant pain for economies like those of Australia and New Zealand. Already acute cost-of-living issues will not only not improve, but deteriorate. The Australian government has previously tried to address these issues with a raft of subsidies—such as electricity bill rebates—and they have implemented a fuel excise reduction this time around.

But they have also learnt that these cost-of-living subsidies are both expensive and inflationary. This places a significant constraint on their ability to use them as a tool to cushion the blow of higher energy prices. Those higher energy prices don’t just bite at the bowser, but ricochet throughout the entire economy, affecting the prices of food, recreation, even consumer electronics and other household goods.

As expected, the Reserve Bank of Australia raised official interest rates by .25 basis points on May 5th, one week to the day before the federal budget of May 12. They faced competing concerns. They are still well behind peer jurisdictions in the fight against inflation, and the energy crisis only exacerbates this challenge. On the other hand, higher energy prices are a handbrake on economic growth, which militates against rate rises.

The RBA will likely raise rates by a further 25 basis points or more over the course of 2026. The real question is timing, not direction.

I’ll have more to say immediately after the Australian federal budget is handed down, but at time of writing it’s shaping up as one containing a number of changes to taxation arrangements. Capital gains tax treatment, negative gearing (at least of investment properties, but perhaps other asset classes), and the treatment of trusts (with a possible 30 per cent minimum tax rate) all loom large. Many Australians may have to reorganise their affairs and will be in need of expert advice at an already tense time.

The Reserve Bank of New Zealand is in a more favourable position than the RBA, having tackled the post-pandemic inflation challenge earlier and more forthrightly. They will still have to deal with the unenviable task of inflation moving up and economic growth moving down. But they are better placed than the RBA to do so.