The federal government had no control over the Iran war. As the Prime Minister remarked in reference to Trump's decision to invade: "Australia was not consulted".

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But this does not mean we have to be passive victims of its economic impact. There are practical things we could do to ease the shock, and there are plenty of things we shouldn't be doing, too.

To state the obvious: the economic impact of the Iran oil shock will be bad.

Our modelling reckons that economic growth will be halved. Inflation will start with a five or a six instead of a four. Unemployment will exceed 5 per cent.

These are conservative estimates and, to be honest, they are pretty unreliable. They are unreliable because we simply don't know what will happen.

Our estimates developed two weeks ago assumed oil prices will be 75 per cent above their price at the start of 2026 (they are already higher).

We assumed the shock lasts two years (the destruction of refineries suggests this is optimistic).

We assumed other countries would increase supply (many of which have now also been attacked).

We assumed households would stop hoarding and even start reducing their fuel use (which is yet to happen).

That's a lot of assumptions. The key point is this: it will be bad, possibly very bad. So, what should we be doing, and what shouldn't we be doing?

Start with the positive things.

The government should withdraw its own demand for liquid fuels.

Defence is one of the biggest consumers. It should be limiting its fuel use unless urgent.

Public servants ideally should not be on planes and should be working from home wherever possible.

The government should instruct all agencies to slash their consumption of liquid fuels and, if they don't, explain why.

The government should encourage others to work from home, too. Every litre of fuel saved is another litre in our reserves.

The government should keep its EV tax incentives in place. To be sure, they are very expensive for the Budget, but removing EV incentives during an oil crisis would be odd.

In fact, we should be encouraging more people to take-up EVs. Maybe this is through increased subsidies. At a minimum, we should remove parallel import restrictions to get our second-hand EV's more than 40 per cent cheaper as they are in New Zealand where no such restrictions exist.

We should abolish all tolls on roads during off-peak periods. If people have to drive, they should be driving off-peak to significantly reduce the fuel consumption that comes from long, congested drives.

We need to get our supply chains working more efficiently. There's more we could do to reduce fuel standards and there are plenty of things states and territories could do to make trucking cheaper, easier and less fuel intensive: remove curfews, give weight threshold concessions, harmonise dimension laws.

Cutting remaining tariffs and allowing anything to be sold in Australia if it has been approved for sale in the EU and America are both unrelated to fuel, but will go some way in getting prices down more generally.

Those are the things we should be doing. What are the things we shouldn't be doing?

First, we should resist the temptation to raid the fuel of our biggest exporters (think: mining, agriculture, manufacturing).

This would be a classic false economy. Taking fuel off them might temporarily provide a bit more fuel to others, but it would also kill off our major exports, rob the economy of the foreign exchange these bring in and undermine their competitiveness in a fragmented world. It would irritate our trading partners, too, to say the least.

If the objective is to keep the economy moving and reduce economic harm, this would achieve the complete opposite. These companies are big enough and ugly enough to take care of themselves during a fuel shock.

Winding back EV supports and winding back structural incentives around decarbonisation are similarly moving in the wrong direction.

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We need more decarbonisation, not less. Had Australia achieved the level of decarbonisation recommended in our recent report today, the impact of the oil shock on Australia would be more than one-fifth smaller. That's $370 billion of economic activity we don't lose. It's 50,000 jobs we don't lose.

The government has committed to a temporary cut in the fuel excise tax.

Micro 101 tells us that if you cut taxes in a market with inelastic supply then all the benefit of that cut will go to producers.

In plain English: if producers can't increase supply because someone has blown up their refinery, then cutting taxes just means more money for oil producers.

Cutting the fuel excise is very understandable from a political perspective ("you're taxing fuel when prices are skyrocketing?!") but it's bad economics. The government's policy only lasts three months. It's probably a good idea to keep it that way.

There are times in public policy where good politics and good economics are pulling in the same direction, and there are times when they are pulling in the opposite direction.

The oil crisis is giving us both. Being able to tell the difference will make all the difference.

Adam Triggs is a Partner at the economics advisory firm, Mandala, and a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution

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