The conflict in the Middle East at the end of February 2026 has disrupted global oil supply, leading to a significant increase in energy prices for consumers across many countries. The disruption is estimated to have affected around 20% of global oil supply, creating immediate pressure on international energy markets.
In Australia, the impact has been felt relatively quickly. Wholesale fuel prices, as reflected in Terminal Gate Prices (TGP), show that as of mid-March 2026, diesel prices have increased by approximately 50%, while petrol prices have risen by around 35% (Figure 1). The sharper increase in diesel prices suggests a strong impact, particularly given its critical role in freight, transport, and logistics.
These rising energy costs are expected to flow through to businesses, increasing operating and distribution costs, which are likely to be passed on to consumers. At a macroeconomic level, this will place upward pressure on headline inflation, as higher fuel costs contribute to increased prices for goods and services, including food and other essential items.
Figure 1: Average Wholesale Energy Price in Australia
Sources: Australian Institute of Petroleum (AIP), FWPA analysis
This external shock has increased uncertainty and is likely to prompt businesses to reassess their strategic plans. It represents a further challenge for Australian businesses, including those in the timber industry.
Prior to the conflict, the latest data from the NAB Monthly Business Survey (February 2026) already indicated weakening conditions, with business confidence falling into negative territory. While there were some signs of easing, including a modest rebound in product prices, inflationary pressures remained persistent (Figure 2).
Figure 2: Summary NAB Monthly Business Survey in February 2026 (n=516)
Source: NAB Monthly Business Survey February 2026
Moreover, the latest GDP growth in December 2025, at 2.6% year-on-year, was largely driven by high demand in the housing sector and public spending. The Reserve Bank of Australia (RBA) projected that growth will slow over 2026–2028 as several major government projects come to an end and the private sector gradually adjusts its activity.
The NAB Business Survey indicates that although there was a rebound in early 2025, capacity utilisation has declined over the past three months. Industry-level data also shows that the manufacturing sector remains stagnant, with capacity utilisation around its long-term average of approximately 78% (Figure 3).
Figure 3: NAB Business Survey – Capacity Utilisation
Source: NAB Monthly Business Survey February 2026
In conclusion, the external shock from the Middle East conflict represents an additional challenge for Australian businesses, which had only recently begun to recover from a steady decline in business confidence. The outlook remains uncertain. If the conflict persists, businesses may have no option but to pass on higher costs, leading to increased prices for consumers. This, in turn, will place further upward pressure on inflation, which is currently above the RBA target band.
