Businesses urged to take proactive action on rising fuel prices

RSM Australia economist Devika Shivadekar has warned that a rise in fuel prices will have a flow-on effect for many Australian businesses, “tightening near-term financial conditions”.

Certain actions, however, may limit the intensity of possible economic impacts for business, according to Shivadekar,

“In light of the current market conditions, we strongly recommend that businesses review their fuel and energy exposure, including contractual pass-through mechanisms, and consider hedging where appropriate,” she said.

Shivadekar added: “stress-testing cash flows and demand under both brief-spike and prolonged-disruption scenarios will help spot any potential issues now.”

For most, if not all industries engaged in external trade, she suggested revisiting supply-chain resilience and shipping routes for goods moving through the area, specifically regarding insurance and alternate sourcing.

It is possible, she noted, that while many industries would face negative repercussions by rising crude oil and commodity prices, some sectors may see positive outcomes.

“Higher energy prices can be a tailwind for parts of Australia’s resource sector, particularly as global buyers look to reduce reliance on Middle Eastern supply and investors gravitate toward safe assets,” she stated.

“Some key assets that come to mind are gold - already outperforming since end of last year - and potentially gas.”

Shivadekar continued: “By contrast, commodities such as iron ore and metallurgical coal face greater vulnerability through slower global activity rather than direct supply disruptions. At the same time, fuel-intensive industries including transport - particularly aviation, and manufacturing are likely to feel margin pressure as energy costs rise.”

The flow-on effect of higher fuel and freight costs, she noted, could erode incomes and thereby effect consumption.

“While the RBA remains cautious about drawing conclusions, a persistent, fuel-driven inflation pulse would most likely prolong the high interest rate environment, reinforcing the growth-inflation trade-off facing the Australian economy.”

AMP chief economist agreed that the rise in petrol prices could potentially increase inflation and weaken economic growth for Australia.

“A 40 cents a litre rise in petrol prices would add about 0.8 per cent to CPI inflation, but it would also impart a dampening impact on growth,” said Oliver.

“This is because it would add around $14 a week to the household petrol bill leading to a cut back in spending elsewhere in the economy. In other words, it will act as a tax on households.”

Oliver said in his view, the implications for interest rates were still ambiguous, however, as the increase in fuel prices was a boost to inflation but a hit to growth.

"We are not changing our view which sees rates on hold with a high risk of another hike," he said.