Prolonged oil shock could cost Australia’s economy billions, EY says

The closure of the Strait of Hormuz could have vastly varying impacts on Australia’s economy depending on how long the disruption lasts, modelling from EY has found.

EY regional managing partner and CEO for Oceania, David Larocca, said that the global fuel crisis was creating a complex set of challenges for Australian businesses.

“While impacts will vary by sector and firm, the common thread is heightened uncertainty, new cost pressures and less resilience in energy dependent systems,” he said.

“Global oil price increases are flowing quickly into transport, logistics, mining, agriculture, construction and manufacturing costs, with fuel acting as both a direct input and an embedded cost across supply chains. Many businesses have limited pricing power so will experience margin compression, rising working capital requirements and greater earnings volatility.”

EY examined four scenarios, ranging from a three-month disruption period to a more prolonged oil shock lasting for the rest of 2026.

Under a ‘contained disruption’ scenario where the shock lasted less than three months, EY predicted that Australia’s GDP would be $7 billion (0.2 per cent) lower than it otherwise would have been in 2026. Under this scenario, household consumption would be down by $11 billion and investment by $7 billion.

In the case of a more severe, prolonged disruption lasting for most of 2026, EY warned that Australia’s GDP could be $42 billion lower for the year, equivalent to roughly $880 million a week in lost activity.

Under this scenario, Australian investment would be down $54 billion, household consumption $70 billion, and approximately 160,000 workers would be “temporarily idled.”

EY also modelled an alternative scenario in which the government intervened through policy, enacting elements of the national fuel security plan. The analysts found that policy intervention could limit GDP losses to approximately $34 billion in the prolonged shock scenario, but failed to remove the underlying global supply constraint or associated business continuity risks.

“Businesses that are stress-testing their operations against different disruption scenarios, identifying critical dependencies and setting clear triggers for action will be better placed to protect margins and maintain continuity if conditions deteriorate,” Larocca said.

“The global fuel crisis is acting as a catalyst for strategic shifts, some already underway by many businesses, including electrification, energy efficiency, greater supply chain resilience and reduced reliance on just-in-time models, where businesses receive goods, materials or inputs only when they are needed rather than holding reserves or stockpiles.”