Inside the catastrophic disaster set to explode Australia’s fragile economy if the Strait of Hormuz shuts down – and that’s just the start

Shutting down the Strait of Hormuz would create a domino effect on the Australian economy by increasing inflation, interest rates and the cost of consumer goods. 

Iran’s decision to effectively close the global trade route in response to US and Israeli strikes has sent oil prices soaring, impacting domestic petrol and diesel costs.

Those increases will have knock-on effects in freight costs, food production, inflation, interest rates, property markets and household budgets. 

Professor Vito Mollica, deputy dean (research and innovation) at Sydney’s Macquarie Business School, said various factors would be ‘compounding on one another’.

‘The knock-on effect of ongoing and higher fuel prices is always that inflation is going to be unexpectedly higher,’ Professor Mollica said.

‘And if there is greater uncertainty around your fuel supply, prices will go up because demand hasn’t been tempered and supply has been cut short.

‘But of course, fuel is only one component of that.’

Professor Mollica said rising fuel costs would have varying impacts on different segments of the economy.

‘They’re not going to be equally felt by all consumers, or all Australians for that matter,’ he said. 

‘If inflation is higher, interest rates naturally are going to be higher, so people can try and temper that demand. 

‘But when you have rising fuel costs, which we don’t know when they’re going to return back to normal, this starts to then affect production costs. 

‘Think about producing food, and where are we going to get that food from? The domino effect is multiplicative.’

Professor Mollica said rising fuel costs would see fewer Australians making international travel plans and interstate trips. 

‘I think household budgets are going to change dramatically depending on which fuel source is going to be in the most limited supply,’ he said.

But Professor Mollica said prices of some products could potentially fall if Australian exports were limited.

‘If we’re not able to undertake our exports of the products that Australia uses, well, then the domestic consumer base will benefit from that,’ he said.

‘Okay, you have to be able to take those goods that we would typically export and convert them into finished products. So it’s not like just us having iron ore cheaper makes our fuel cheaper.’

Professor Mollica said property markets would also be impacted by the domino effect.

‘Housing is traditionally seen as a safe area, so people with discretionary funding may decide to put their money into bricks and mortar,’ he said.

‘But for those that are over-leveraged, the rising interest rates will be a negative for them. 

‘Will this mean that we could see a pick-up in arrears and foreclosures? I don’t think you’ll see that immediately. Interest rates are at their highest. 

‘It seems that the Australian consumer is able to bear this increased interest rate cost for a little bit longer before the concept of trying to liquidate an investment property or an over leveraged home will come to fruition.’

Professor Mollica cited the MQBS BOSS index maintained by Macquarie University which looked at business sentiment. 

‘Most businesses expect prices to be increasing over the next 12 months, and they’ve actually already started to increase their prices, or factor that increase,’ he said.

‘Our latest MQBS BOSS Index shows businesses now expect prices to rise by 3.7 per cent, a 40-basis-point increase following the escalation of the conflict. 

‘While this is a material shift, it is not yet catastrophic. However, the longer the war persists and potentially broadens, the greater the upside risk to inflation. 

‘Importantly, this pressure is broad-based across industries.’

War in the Middle East has also seen the price of fertiliser drastically increase and supply chains disrupted.

‘Something I’ve been concerning myself with is it’s not only fuel, but it’s the reliable source of fertiliser,’ Professor Mollica said. 

‘If we don’t get this fertiliser, our crop yields are not going to be great. 

‘Some farmers might not decide to harvest, because it’s a bit of a gamble, right? They’re going to put up all this cost, and they don’t know what they’re going to get.

‘I think farmers are in a very tricky spot right now as they plan their autumn seeding.’

Dr Lurion De Mello, senior lecturer in applied finance and fuel security expert at Macquarie University, said rising diesel prices would affect the price of fish.

‘Diesel is going to have an impact across everything,’ he said. 

‘I mean, we focus on farming and stuff, but our fishing trawlers rely on it. There’s now pressure that seafood prices are going to go up.’

Dr Vinh Thai, professor of logistics and supply chain management at Melbourne’s RMIT University, said disruptions to energy and shipping were already beginning to place pressure on other imported goods and their prices. 

‘While sustainability efforts often focus on reducing reliance on fossil fuels, the reality is that petrochemical components, derived from crude oil and natural gas, underpin more than 6,000 everyday products and high‑tech devices,’ Dr Thai said.

‘A prolonged or expanding conflict in the Middle East will inevitably strain the supply of key inputs into Australia.’

Dr Thai said petrochemicals were ‘foundational’ to the medical industry, from pharmaceuticals such as aspirin, vitamins and antihistamines to medical equipment and disposable healthcare items including nappies and sanitary products.

‘Australia imports around 90 per cent of its medicines, with pharmaceutical products ranking among the country’s top 10 imports, valued at approximately US$11.86billion in 2025,’ he said.

‘If the conflict persists, the impact could intensify, particularly if exporting countries impose restrictions or bans, making it critical to closely monitor supply chain risks to ensure continuity of medical supplies.

‘With no clear signs of the conflict easing, Australia may face longer shipping times, short‑term shortages and temporary price increases for medical supplies as supply chain pressures build.

‘These disruptions extend beyond healthcare and we will see the impact in our daily lives across many critical areas.

‘Consumer goods, plastic products and fertiliser (which will flow into food production) could all be affected.’