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Politics
Doing Nothing Might Be the Smartest Move
Every time fuel prices spike, the same reflex kicks in. The Reserve Bank of Australia starts talking tough on inflation, and the government scrambles to soften the blow with subsidies - if you find that confusing, you are not alone.
When oil prices rise, Australia effectively gets poorer. It’s that simple. We are importing more expensive energy, so more money leaves the country. That money is not circulating through local businesses—it’s going offshore. Households feel it immediately at the bowser, and businesses feel it through loss of sales plus additional freight and input costs.
And here are the key points:
There is already evidence that Australians are pulling back. Reports ahead of Easter showed many households cancelling or shortening road trips because of higher fuel prices, with surveys indicating a significant proportion of motorists driving less or choosing closer destinations. NRMA has been reporting exactly this behaviour.
It is also well known in the retail industry that sales fall when fuel prices rise. It’s one of the most reliable indicators I’ve ever come across. Petrol goes up, discretionary spending goes down. People don’t stop buying food or paying rent, just less for everything else.
So let’s call it out, high fuel prices work as a natural brake on the economy.
The cost of most products rise as a result of high fuel prices. In economic terms, demand is already being destroyed without any help from policymakers. Which brings us to the problem.
This is imported inflation. It is coming from global energy markets, geopolitical tensions, and supply constraints, not as a result of too much cash in circulation.
The Reserve Bank of Australia sees higher fuel prices feeding into inflation and responds by keeping interest rates high. At the same time, the federal government steps in to soften the impact, recently announcing a temporary cut to fuel excise worth about 26 cents per litre, as reported by Reuters.
The central bank says: “We need to slow demand.” The government says: “We need to support households.”
In other words, one hand on the throttle and the other hand on the brake.
The deeper issue here is that not all inflation is the same.
When inflation is driven by excessive domestic demand—too much money chasing too few goods—then higher interest rates make sense. Spending slows, and inflation settles down. But that is not the current problem.
The RBA's purpose is to prevent governments from spending beyond their means, which is what typically happens when left unchecked. This is done by increasing interest rates to curb inflation. The word inflation or overheated economy cleverly disguises the real problem (government spending) and instead pushes it back onto its citizens, as in you are spending too much.
No the citizens didn't actually do anything wrong - they are simply being asked to take the pain after a budget overrun.
So in the case of the current oil shock, the responsible action might actually be no action at all, other than managing our oil reserves and introducing rationing if and when the situation calls for it.
It is always unfortunate when war somewhere in the world affects us, but it's unlikely that the Australian government will change that.
When oil prices rise, Australia effectively gets poorer. It’s that simple. We are importing more expensive energy, so more money leaves the country. That money is not circulating through local businesses—it’s going offshore. Households feel it immediately at the bowser, and businesses feel it through loss of sales plus additional freight and input costs.
And here are the key points:
There is already evidence that Australians are pulling back. Reports ahead of Easter showed many households cancelling or shortening road trips because of higher fuel prices, with surveys indicating a significant proportion of motorists driving less or choosing closer destinations. NRMA has been reporting exactly this behaviour.
It is also well known in the retail industry that sales fall when fuel prices rise. It’s one of the most reliable indicators I’ve ever come across. Petrol goes up, discretionary spending goes down. People don’t stop buying food or paying rent, just less for everything else.
So let’s call it out, high fuel prices work as a natural brake on the economy.
The cost of most products rise as a result of high fuel prices. In economic terms, demand is already being destroyed without any help from policymakers. Which brings us to the problem.
This is imported inflation. It is coming from global energy markets, geopolitical tensions, and supply constraints, not as a result of too much cash in circulation.
The Reserve Bank of Australia sees higher fuel prices feeding into inflation and responds by keeping interest rates high. At the same time, the federal government steps in to soften the impact, recently announcing a temporary cut to fuel excise worth about 26 cents per litre, as reported by Reuters.
The central bank says: “We need to slow demand.” The government says: “We need to support households.”
In other words, one hand on the throttle and the other hand on the brake.
The deeper issue here is that not all inflation is the same.
When inflation is driven by excessive domestic demand—too much money chasing too few goods—then higher interest rates make sense. Spending slows, and inflation settles down. But that is not the current problem.
The RBA's purpose is to prevent governments from spending beyond their means, which is what typically happens when left unchecked. This is done by increasing interest rates to curb inflation. The word inflation or overheated economy cleverly disguises the real problem (government spending) and instead pushes it back onto its citizens, as in you are spending too much.
No the citizens didn't actually do anything wrong - they are simply being asked to take the pain after a budget overrun.
So in the case of the current oil shock, the responsible action might actually be no action at all, other than managing our oil reserves and introducing rationing if and when the situation calls for it.
It is always unfortunate when war somewhere in the world affects us, but it's unlikely that the Australian government will change that.
