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The Butterfly Effect: How Middle East Conflict Could Ripple Through Australia’s Infrastructure Industry
By Ryan O’Neill, Director, Civil Project Partners
When geopolitics meets infrastructure delivery
Infrastructure delivery is often thought of as a domestic challenge — planning approvals, procurement strategies, labour availability and contractor capability.
But the reality is that infrastructure markets are deeply connected to global economic forces. Events thousands of kilometres away can quickly ripple through construction supply chains and project budgets.
The escalating conflict involving the United States, Israel and Iran is a case in point.
While the immediate focus is understandably on geopolitical implications and regional security, the conflict is already influencing global energy markets. For infrastructure professionals, this matters because energy prices, particularly oil, flow directly into the cost of building and maintaining infrastructure.
This is where the “butterfly effect” becomes relevant.
A conflict in the Middle East can ultimately influence the cost of diesel in Australia, which in turn affects the cost of operating construction equipment, transporting materials and producing key inputs such as bitumen.
For the infrastructure industry, these ripple effects can be significant.
Oil markets respond quickly to geopolitical risk
Global oil markets are highly sensitive to geopolitical instability, particularly in regions that play a critical role in global energy supply.
Iran sits near the Strait of Hormuz, one of the most important shipping routes for global oil exports. Around 20 per cent of the world’s oil supply passes through this corridor.
Even the possibility of disruption in this region can drive volatility in oil prices.
Since the conflict escalated, global benchmark oil prices have already begun responding to heightened geopolitical risk, with Brent crude prices rising sharply as markets factor in potential supply disruptions.
For Australian industries reliant on fuel, including construction, these movements translate quickly into higher operating costs.
Diesel: the fuel that powers construction
Diesel is the lifeblood of the construction industry.
Excavators, graders, rollers, haul trucks and pavers all rely on diesel-powered engines. Construction logistics, including the transportation of aggregates, concrete, steel, and other materials, also depend heavily on diesel.
When diesel prices rise, the effect is felt across the entire project supply chain.
In Australia, diesel pump prices have historically followed movements in global oil markets. When oil prices spike, diesel prices at the pump typically rise soon after.
Infrastructure contractors are particularly exposed to these changes because fuel is embedded in almost every aspect of project delivery.
“Construction is fundamentally a diesel-powered industry,” says Civil Project Partners Director Ryan O’Neill.
“When fuel prices move, the impact is felt immediately across plant operations, transport costs and materials production.”
Even relatively modest increases in fuel prices can significantly affect project costs.
Bitumen and asphalt: the oil link most people overlook
Beyond fuel, oil price movements also influence the cost of certain construction materials.
Bitumen, the binder used in asphalt, is a direct byproduct of crude oil refining. As a result, global oil prices have a strong influence on bitumen pricing.
This means that geopolitical shocks affecting oil supply can eventually influence the cost of road construction and maintenance.
Asphalt production is also energy-intensive. It requires heating aggregates and bitumen to high temperatures, typically using diesel or gas-powered equipment.
When oil prices rise, both the raw material cost of bitumen and the energy cost of asphalt production can increase.
“Bitumen pricing is closely linked to global oil markets,” O’Neill says.
“When oil prices move significantly, asphalt suppliers inevitably start reviewing their pricing. We are seeing indicative pricing increases that show an increase in bitumen costs that will mean a 50mm thick layer of wearing course will cost an extra $10-12k per lane km.”
For infrastructure projects involving large volumes of roadworks, these changes can have a noticeable impact on project budgets.
The contract problem
The challenge for many contractors is that infrastructure projects operate on long timelines.
Contracts and tenders are often priced months, sometimes years, before construction begins. Contractors typically submit bids based on expected input costs at the time.
Few tenderers, when preparing bids six months ago, would have factored in the potential for escalating geopolitical conflict in the Middle East.
As standard contracts typically do not have “rise and fall” clauses unless agreed and many contracts have removed provisions that were included during the COVID pandemic.
This means contractors can find themselves locked into fixed pricing even when input costs increase significantly.
“Most contractors price risk based on reasonably foreseeable market conditions,” O’Neill says.
“A sudden geopolitical shock that drives global oil prices higher isn’t something that’s typically built into tender pricing.”
The subcontractor squeeze
The effects of cost increases often emerge first among subcontractors and suppliers.
Plant operators, transport providers and asphalt suppliers all face higher fuel costs when diesel prices increase.
Initially, many subcontractors absorb these costs in the short term. But sustained increases eventually need to be reflected in pricing.
This can create pressure throughout the supply chain.
“If diesel prices remain elevated for an extended period, subcontractors will inevitably have to pass those costs on,” O’Neill says.
Asphalt suppliers have already flagged an increase in asphalt ~10% immediately to cover current pricing shocks, with no timeframe for how long the cost increases will be in force.
“They may absorb the impact for a period, but it isn’t sustainable indefinitely.”
In large infrastructure programs involving multiple subcontractors and suppliers, these pressures can accumulate quickly.
Lessons from the COVID cost spike
The infrastructure industry has seen this dynamic before.
During the COVID-19 pandemic, supply chain disruptions drove significant increases in the cost of materials such as steel, timber and shipping.
Projects tendered before these cost increases occurred often faced significant financial pressure during delivery.
As a consequence, many clients included rise-and-fall clauses in contracts at the time, which were removed once pricing stabilised.
The current geopolitical situation has the potential to trigger similar dynamics, particularly if oil markets remain volatile.
Preparing for volatility
For project owners and contractors alike, the key lesson is that global events can influence infrastructure delivery in unexpected ways.
Energy prices, supply chain disruptions and geopolitical instability can all affect project costs and timelines.
While these factors are largely outside the control of individual project teams, understanding how they influence infrastructure markets can help organisations respond more effectively.
As the global situation evolves, the infrastructure industry will be watching closely to see whether current market volatility proves temporary — or whether it becomes another reminder that even distant geopolitical events can ripple through construction supply chains in very real ways.