Australia is borrowing from abroad to pay higher fuel prices

Australia’s dependence on imported fuel has an economic cost that goes well beyond the price at the petrol pump.

In the June quarter, Australia recorded a $5.1 billion deficit on trade in goods and services, while the broader current account deficit reached $27.2 billion. The deterioration was driven partly by imported fuel, with the value of fuel and lubricant imports rising 42.5 per cent as global oil and refined-product prices surged.

The important point is that Australia did not simply receive much more fuel. Across all goods imports, prices rose 4.4 per cent, while physical import volumes increased only 2.4 per cent. Australia was therefore paying substantially more overseas for what it consumed.

When Australia spends more overseas than it earns, the difference ultimately has to be financed through some combination of additional foreign liabilities, foreign ownership of Australian assets, or reductions in Australian holdings of overseas assets.

That matters because fuel is consumed quickly.

Borrowing from overseas to finance a new factory can make economic sense: the factory remains and can generate income for decades. Paying substantially more for imported diesel or petrol is different. The fuel is burned, while the foreign financial claim used to help finance Australia’s external deficit can remain.

Australia’s net foreign debt already stood at $1.486 trillion at the end of June.