Australia can reduce future inflation shocks by cutting its reliance on imported oil products, the Institute for Energy Economics and Financial Analysis said Wednesday.
A new IEEFA Australia report said the country has shifted from oil self-sufficiency to import dependence over the past generation, exposing the economy to fuel supply disruptions and price spikes highlighted by the Iran fuel crisis.
Australia imports about 90% of its diesel, 80% of its jet fuel and 68% of its petrol. Since 2000, diesel consumption has increased 2.5 times, while jet fuel demand has nearly doubled, the report said.
"It is now the world's largest importer of diesel, representing 10% of net global seaborne trade. Australia is also the third-largest importer of jet fuel and petrol. This is well above the country's share of global GDP," said Amandine Denis-Ryan, chief executive officer of IEEFA Australia.
The report said oil prices have increased by an average of 6.9% annually since 2000, while oil-related costs have risen by 8.9% annually. Geopolitical tensions have also contributed to greater price volatility.
Oil price increases affect inflation through household transport costs, higher prices for goods and services, and inflation expectations. Household transport spending alone contributed one percentage point to consumer price inflation in March, according to the report.
The Reserve Bank of Australia raised interest rates by 0.25% last month, citing concerns that the latest oil shock could spread into broader inflation across the economy.
"For severe shocks with a high chance of unanchoring inflation expectations, they will take forceful monetary policy action," Denis-Ryan said. "In the case of an initial supply-side shock... a forceful response can have high economic costs, potentially leading to a recession."
The report said tighter monetary policy can increase the cost of transitioning away from fossil fuels, even as some European central bankers advocate faster energy transitions to improve long-term price stability.
Australia could reduce one of its biggest sources of imported fuel demand by speeding up transport electrification, according to the report. IEEFA said a near-complete shift to electric road transport by 2050 would lower the country's oil consumption by roughly 50%.
Transport electrification would require electricity equal to 42% of current demand, making faster grid upgrades and integration technologies essential to support the transition.
IEEFA also called for cheaper EV financing, noting electric vehicles will require about AU$1.3 trillion ($896.77 billion) of investment through 2050. The report urged the Reserve Bank of Australia to consider discounted lending facilities until EVs reach cost parity.