Weekly Energy Update

Australian Wholesale Fuel Prices

Finding r-star after the Great Divergence

TL;DR: r-star, the real neutral rate of interest, is one of the unobservable star variables in mainstream macroeconomics. It is notoriously hard to estimate. The Australian IS curve coefficient on the real-rate gap is small relative to macro noise, so the model cannot choose between a growth anchor, a bond-yield anchor, or a blend of the two. Those three approaches, drawing on Wicksell, imply a real r-star between roughly 1.5 and 2.6 per cent, and a nominal neutral cash rate between about 4.0 and 5.1 per cent. With the RBA policy cash rate at 4.35 per cent, policy is not extreme. The data alone does not say whether it is mildly restrictive or mildly accommodative. The post-GFC track record and Governor Bullock’s recent language both lean toward the yield-anchored interpretation, on which 4.35 per cent is mildly restrictive.

Finding r-star after the Great Divergence

After doing additional analytical work that further shaped my views, I have withdrawn my original post. 

Please see the replacement post here.

Weekly Energy Update

 Crude prices/futures

Update on the Iran War: the Mexican Standoff

Where Things Stand

Sixty-one days after Operation Epic Fury began, the war has settled into a structure neither side wants to call by its real name. The shooting has mostly stopped. Nothing else has been resolved.

A two-week ceasefire took effect on 8 April after Pakistani mediation. Trump has since extended it indefinitely. Both sides have accused each other of repeated violations. On 11 and 12 April, US and Iranian officials met face-to-face in Islamabad for twenty-one hours, the highest-level direct talks since 1979. They produced nothing. By 12 April Vance had publicly conceded no agreement. By 13 April the US Navy had imposed its own blockade on Iranian ports. By 18 April Iran had reimposed the Hormuz closure it nominally lifted the previous day.

This is the war now. A dual blockade with no agreed terms, no fixed deadline, and no visible off-ramp. Iran controls the Strait of Hormuz. The United States controls Iranian ports. Both sides are inflicting sustained economic pain on each other and on third parties who never asked to be involved. US Central Command (CENTCOM) has redirected 38 ships from Iranian ports. Iran has reduced Hormuz traffic to a trickle. The Pentagon has assessed that mine clearance alone could take six months.

Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.

Should the RBA Raise Rates in May 2026

The Monetary Policy Board meets on 4 to 5 May. The cash rate sits at 4.10 per cent after two consecutive 25 basis point hikes in February and March, the first reversals of the easing cycle that ran through 2025. Markets are pricing roughly a 60 per cent chance of a third hike. The case for or against another move depends on what the data say about the underlying inflation problem, not on what borrowers would prefer to hear.

The framework set out in Inflation: Causes, Diagnosis and Cures is a useful discipline here. Diagnose first. Decide second. Skipping the diagnostic step is how public commentary about monetary policy generates more heat than light. So let me work through the diagnosis using the five drivers the framework identifies, then turn to the policy question.

Inflation: Causes, Diagnosis and Cures

The Bloomberg Commodity Index, a broad-based benchmark covering energy, metals, and agricultural commodities, is up at the moment. In the past this index has been correlated with periods of higher inflation.

Weekly Energy Price Update

 Spot prices

Stagflation: the Lead in Australia's Saddle

Previously I argued that the Reserve Bank's credibility is a critical defence against a repeat of the 1970s stagflation experience. That is true, but it is only half the story. The other half is the architecture around the central bank, which determines whether that credibility can do its work. 

This post is about the broader architecture necessary to manage inflation, told through the question that the set of charts below forced me to confront: Why did Australia take so much longer than everyone else to get inflation back under control after the 1973 oil shock? The UK, Japan and Italy all had an inflation peak higher than Australia's in the wake of the oil shock. All were broadly back towards pre-shock inflation levels in three to eight years. Australia took 15+ years. 

Stagflation

I grew up with stagflation. In the 70s and 80s it was the word everyone reached for, here and abroad. Inflation and unemployment were both pushing towards double digits at times. The misery index piling up month after month. And it stuck around. The United States got out because Paul Volcker (Chairman of the Federal Reserve 1979-1987) broke the back of US inflation at the cost of a brutal global recession in the early 1980s. Australia took longer to reset, and only fully closed the chapter with the recession we had to have in the early 1990s.

What Australia Owes Itself

The Principle Is Simple

Australia's minerals belong to the nation – the people. The Commonwealth owns Australia's offshore petroleum resources. The States own onshore minerals – coal, iron ore, gold, lithium, every extractable resource beneath Australian soil. Private companies do not discover resources and then own them. They apply for the right to extract resources that already belong to the nation, and that right should only be granted on the basis of a reasonable return to the people who own them.

This principle has been watered down. The Federal Government has allowed private companies – many of them foreign-owned multinationals – to extract finite, irreplaceable public wealth at scale while returning far less than the value of what is being alienated, and far less than Norway, the United Kingdom, and other comparable jurisdictions capture. Six of Australia's ten liquefied natural gas (LNG) export facilities pay no royalties and little or no Petroleum Resource Rent Tax (PRRT), despite generating billions in annual export revenue. 

The Australian Taxation Office's (ATO) Corporate Tax Transparency data shows the oil and gas sector has been a systematic low payer of PRRT relative to its revenue scale. That pattern has prompted repeated policy intervention to secure a more timely and minimum return from the offshore LNG industry. These are not normal business profits on private assets. They are returns on resources that belong to Australians, and Australia is not receiving a fair share of them.

This is not an argument about government needing more money to spend. It is a prior question: on what terms should a government grant private companies the right to extract and sell public assets? The answer should be straightforward – only on terms that deliver a fair return to the owners. Norway has built a sovereign wealth fund worth \$1.9 trillion, roughly \$350,000 per citizen, on exactly that basis. The question for Australia is not whether to insist on fair terms. It is how to get there from where we are now, given two previous failed attempts and constitutional arrangements that complicate comprehensive reform.

Weekly energy price update.

On Friday, Iran's Foreign Minister announced that the Strait of Hormuz had been reopened to commercial vessels, coinciding with the Israel-Lebanon ceasefire. The announcement occurred after markets had closed for the weekend in Australia and Singapore, but before they had closed in Europe or the United States. While Iran states the strait is fully operational for commercial traffic, vessels must use Iranian-designated routes and obtain permission from Iranian authorities. The US naval blockade of Iranian ports remains in place. Markets reacted strongly to the news, with oil prices falling sharply and stock indices reaching record highs.

Crude oil benchmarks

Net Permanent and Long-Term Arrivals

A quick note on why Net Permanent and Long-Term Arrivals (NPLT) is not a useful measure of Net Overseas Migration (NOM) - even though it gets quoted constantly (because it's timely and deliciously large).

NPLT counts border crossings by stated intention (staying/leaving for 12+ months). The ABS explicitly cautions against treating it as a migration proxy: intentions shift, the 12-month rule produces double-counting, and it doesn't reconcile with the population.

The following chart shows why this matters. Three measures of the ostensibly same thing:

Weekly update: energy prices

 Global benchmark prices

Updated weekly fuel prices

GDP Nowcast: Q1 2026

Summary

Australia's GDP is tracking +0.78% quarter-on-quarter (+2.93% through the year) based on data available as at 6 April 2026. If realised, this would be the strongest quarterly outcome in three quarters and would push annual growth to its highest since early 2023.

Updated Energy Benchmarks

Housing Tax Reform without Housing Reform

The Setup

The Albanese government is set to announce changes to negative gearing and the capital gains tax discount in the May 12 budget. It will be framed as a landmark moment for housing affordability and intergenerational equity. It is neither. It is a modest tax adjustment to second-order mechanisms in a system whose first-order problems are not being touched.

Here is what the policy is, why it matters at the margin, and why it does little to fix housing purchase affordability and may even harm rental affordability.

Groupthink with a Group of One

Introduction

Before the war:

1. Iran didn't control the Strait of Hormuz. Now it does.
2. Iranian oil was sanctioned. Now it isn't.
3. Iran was not building a nuclear weapon. Now it will.
4. US bases in the Gulf were assets. Now they are liabilities.
5. US inflation was declining. Now it is increasing.

That five-point summary, from financial analyst @TheMaverickWS, is the most concise strategic audit of Operation Epic Fury yet written. Each point is directionally clear, even if the margins of some are debated. One note on point one: control doesn't require a physical blockade. Iran's missile threat has been sufficient to make the risk calculus unacceptable to insurers and ship operators alike. The result is functionally identical – traffic has stopped. Together the five points describe a war that has actively worsened the situation on every dimension it claimed to be addressing. File it away. We will return to it.

CPI Reform Won't Fix Housing

Introduction

There is a growing chorus of voices arguing that Australia's Consumer Price Index is broken. The CPI, they say, fails to capture the real cost of living because it excludes house prices – the single largest purchase most Australians will ever make. The frustration is genuine. The lived experience of millions of Australians – particularly younger ones, renters, and aspiring first home buyers – diverges sharply from what the headline inflation number suggests. When the Treasurer announces that inflation is under control and real wages are growing, people who cannot afford to buy a home, or who are watching mortgage repayments consume an ever-larger share of their income, are understandably sceptical.

But the argument that the CPI should be reformed to include house prices, land costs, or mortgage repayments rests on a fundamental confusion about what housing affordability actually is. Housing is not one problem. It is three distinct problems, each driven by different forces, each requiring different policy responses, and each moving in different directions in response to the same policy lever. No single price index can combine all three in a way that remains conceptually coherent, policy-usable, and suitable as a monetary target – and trying to force them into one would produce a measure that misleads more than it illuminates, while damaging one of the most important instruments in Australia's macroeconomic framework.

Underlying the whole debate is a confusion between two things that are not the same: a headline indicator of lived economic pressure, and a target variable for monetary policy. The public wants the first. The Reserve Bank needs the second. Forcing a single number to do both jobs is the source of most of the confusion – and it cannot be resolved by reforming the CPI, because the two purposes are structurally in tension.

Let's start with the three housing affordabilities.

Energy Prices Update

 Global prices

From December through late February, all four benchmarks traded in a tight \$60–70 band, with Brent carrying its usual small premium over WTI and the Middle East grades clustered nearby. The Hormuz closure changed that almost instantly. Within days, prices spiked \$50–100 across the board – but the move was not uniform. WTI and Brent priced in a global supply shock; Oman and Dubai appear to have priced in that plus the direct disruption of their primary export route.

Australia's Oil Reserve in America

A Country Running on Empty

For years, Australia has been embarrassingly non-compliant with its International Energy Agency (IEA) obligations. As an IEA member, Australia is required to hold emergency reserves equivalent to at least 90 days of net oil imports. Yet for well over a decade, the country has consumed more oil than it produces, and its emergency reserves have been consistently among the lowest of any IEA member country.

Energy costs are rising

Why Housing is (Primarily) a Supply Problem

Australia's Population Growth is Extraordinary – and Hard to Justify

The Australian housing debate has a favourite villain: immigration. Too many people, not enough homes. It's an intuitively appealing argument, and the population data is genuinely striking. But it's the wrong diagnosis – and wrong diagnoses lead to wrong policy.

Let's start with what the data actually shows. By any international comparison, Australia's population growth rate is remarkable. Since 2000, Australia's population has grown to an index of 142 against a base of 100 – well above the OECD mean of 117 and median of 115. Since 2022 alone, Australia has grown at around 2.2% per year, second only to Saudi Arabia and Canada among OECD-monitored nations, and roughly double the OECD average.

The Most Dangerous Scenario – and Why It Explains This War

The Eight Rationales – designed to obfuscate

On 28 February 2026, the United States and Israel launched Operation Epic Fury, killing Supreme Leader Ali Khamenei and triggering the most significant military engagement in the Middle East since the 2003 invasion of Iraq. Within days, the Trump administration had offered not one explanation for the war but eight – a proliferation of justifications that, far from clarifying the mission, seemed designed to obscure it.

Those eight rationales, as catalogued by commentators and confirmed by officials in overlapping and sometimes contradictory statements, were:

1. To ward off an imminent Iranian threat – a claim rejected by Iran, by the Pentagon, and by US intelligence assessments that found no evidence of an impending Iranian attack.
2. To enforce a publicly drawn red line – Trump had warned the regime against shooting protesters. Once crossed, the logic of his public identity required a response regardless of strategic calculation.
3. To pre-empt Iranian retaliation against US forces following an expected Israeli strike – Secretary of State Rubio’s candid admission: “We knew that there was going to be an Israeli action. We knew that that would precipitate an attack against American forces.”
4. To destroy Iran’s missile and military capabilities – a degradation objective with operational logic, even if it falls well short of a strategic rationale for war.
5. To prevent Iran from obtaining a nuclear weapon – Trump’s stated casus belli in the State of the Union Address, though the IAEA reported no evidence of a structured nuclear weapons programme at the time strikes commenced.
6. To secure Iran’s natural resources – an objective floated by administration officials and widely noted, though rarely elaborated upon.
7. To achieve regime change and bring the Iranian opposition to power – a goal with broad Israeli support and a long tail of strategic complications.
8. Force protection by pre-emption – the US joining the strikes not from independent strategic conviction but to control escalation dynamics before an ally’s action forced a reactive entry.

Australia's Fuel Reserves

Australia's fuel vulnerability didn't begin when the first US strikes hit Iran. It began around 2012, when Australia quietly fell below the 90-day oil reserve requirement it had been treaty-bound to meet since joining the IEA in 1979 – and stayed there.

By the time the current crisis started, Australia's reserves sat at around 36 days of petrol, 32-34 days of diesel, and 29-32 days of jet fuel – figures the government has cited as the highest in 15 years. That context matters, but so does what those numbers actually mean. Multiple non-comparable metrics, different inclusions for ships on-route and/or in Australia's exclusive economic zone, and the question of what is continuing to arrive and what has been released since make it surprisingly difficult to pin down the true usable buffer at any given moment. The fact that we can't get a clean number after a crisis has already started is itself part of the story.

Once fuel already in transit is stripped out, the usable buffer may be materially closer to four weeks. The critical reserve appears to be jet fuel. China – which supplied roughly 32 per cent of Australia's jet fuel imports in 2025 – has instructed refiners to halt new fuel export contracts, a move expected to cut Australian supply from April.

Australia's savings problem and the current account deficit

Introduction

Take a look at the chart above. At first glance it’s just two wiggly lines. But those two lines tell a story about the Australian economy that stretches back more than half a century – and it’s a story that affects everything from your mortgage rate to your superannuation.

The Australian Economy: Q4 2025

Introduction

I run several Bayesian macroeconomic models of the Australian economy. They fit the data to the model structure and estimate how much each variable is contributing to the key unobservables – the natural rate of unemployment and the potential growth rate. What follows is what those models are currently telling me.

But first, let's quickly recap on the RBA's policy rate, the current state of Australian inflation, and the current unemployment rate.

Q4 2025 National Accounts Update

An update to my December 2025 Economic Outlook

Introduction

Every national accounts release contains both good and bad news, and Q4 2025 is no exception.

GDP per capita is improving. Labour productivity is moving in the right direction. Real wages have reached a new high. These are genuine improvements, not statistical noise, and they deserve acknowledgement.

But the balance of this release tilts toward concern rather than celebration. Domestic inflation remains stubbornly above target. Unit labour costs are still too high. Government spending continues to crowd out private activity. And the RBA is now reversing rate cuts it should not have made.

This is not a crisis. It is not the end of the world. But the list of issues requiring attention is longer than the list of developments deserving applause.

The Headline: GDP Growing above Inflationary Speed Limit

GDP growth has lifted from the anaemic sub-1.5% rates seen through much of 2024. But 2.56% annual growth is not a recovery – it is the economy running above its compressed speed limit of roughly 2%. Australia’s potential has fallen over the past decade as productivity stagnation has lowered the economy’s supply capacity.

The December outlook argued that near-2% growth reflects supply constraints rather than demand deficiency. The Q4 data confirms this: growth has accelerated and domestic inflation remains elevated. That combination only occurs when an economy is at/above capacity. There is no spare room here.

Follow the Science: Science, Uncertainty and Values in the Pandemic

This essay is a companion to Is Macroeconomics a Science? which examines the epistemological status of macroeconomics as a social science – its reliance on provisional models, its forecasting limitations, its embedding of value judgements within technical frameworks, and the tension between orthodoxy and productive dissent. The pandemic exposed remarkably similar dynamics in public health: provisional models communicated as certainty, values disguised as science, dissent suppressed rather than engaged, and institutional authority overextended beyond what the evidence could support. The parallels are not coincidental. They reflect a structural problem in the relationship between expertise and democratic governance that applies wherever technical knowledge is used to justify political choices.

How Interest Rate Targeting Works

The Main Channels

The RBA identifies four main transmission channels in its April 2025 Bulletin article on monetary policy transmission through the lens of its MARTIN and DINGO models (Mulqueeney, Ballantyne and Hambur 2025). Christopher Kent, as Assistant Governor (Financial Markets), added a fifth – the credit channel – in his October 2023 address to Bloomberg. These aren't exhaustive, but they're ones the RBA can quantify in its models. I'll come back to some others later.

Monetary Policy: Asymmetries, Lags, and the Case for Purposefulness

Introduction

The textbook story of monetary policy is deceptively simple: raise rates to cool inflation, cut rates to stimulate demand. In practice, the transmission mechanism is neither symmetric nor uniform. Different channels operate at different speeds, rate hikes bite harder and faster than rate cuts heal, and the labour market – the variable central bankers care most about – is the slowest to respond. Understanding this structure explains both why central banks should be deliberate in their actions, and why a rapidly falling unemployment rate during above-band inflation is one of the most worrying signals in macroeconomics.

Where Is the NAIRU? And What Does It Mean for the RBA?

Introduction

The NAIRU – the non-accelerating inflation rate of unemployment – is back at the centre of the Australian monetary policy debate. With the RBA hiking in February and the next meeting in mid-March, the question isn't really about the direction of policy anymore. It's about pace. Should the RBA hike again in March, or wait for the Q1 quarterly data and (depending on that data) act in May?

The answer depends almost entirely on where you think the NAIRU sits.

Is Macroeconomics a Science?

TL;DR

• Macroeconomics is a science - but a fragile, conditional one. It is a social science, not a natural science like physics or chemistry.
• The right test isn't Popper's falsifiability but Lakatos's question: is the dominant research programme generating new, empirically confirmed insights - or just patching failures?
• We should trust macroeconomists on mechanisms and trade-offs, be sceptical of precise forecasts, and be honest about where technical analysis ends and political judgement begins.

Australia's Productivity Problem: A Lost Decade and Why AI Won't Save Us

Australia has a productivity problem. You've heard this before. But the usual story - a gradual slowdown, structural shifts toward services, Baumol's disease - misses what's actually happened.

The real story is starker: Australia had exactly one period of meaningful productivity growth in the last 45 years. It lasted about twelve years. Before and after: stagnation. And since 2015, even the strategies that previously masked this problem have stopped working.

From Phillips to Policy: What Should Anchor the NAIRU?

The Expectations Revolution

The original Phillips Curve is a beautiful empirical regularity: lower unemployment meant higher inflation. Policymakers in the 1960s thought they faced a stable menu of choices - trade off a bit more inflation for a bit less unemployment, or vice versa. The current Phillips curve in respect of Australia looks like this.

Why Did the US Invade Venezuela?

I have been trying to get an understanding of why the US invaded Venezuela. So far I have a bunch of theories, none of which I find compelling.

Why 2.5% Potential Growth is Wrong

Australia's potential GDP growth is closer to 2% than the 2.5% Treasury assumes. The difference matters for inflation, interest rates, and fiscal policy.