Motorists face petrol prices of up to $1.70 a litre within days and could be paying more than $1.80 a litre by next month after fresh tensions in the Middle East pushed the oil price to a record high.
The bad news came as the Federal Government delivered its strongest hint yet that a new emissions trading scheme - set to begin in 2010 - would include transport.
That could mean even higher costs for motorists, who would be forced to cover the price of carbon embedded in the petrol they use.
Concerns about volatility in the Middle East and a weaker US dollar helped lift the global barrel price of oil by $US11 to a record $US139 ($A145), one of the biggest jumps ever. Investment house Morgan Stanley is now predicting oil will hit $US150 a barrel by July.
Oil prices have doubled in the past 12 months, and are up 42pc since the beginning of the year, leading to warnings that the cost of petrol will hurt the economy, dampening consumer demand and pushing up business costs.
Macquarie Bank interest rate strategist Rory Robertson said the price surge was likely to have serious ramifications for the world economy, "sucking the life out of discretionary spending".
"If the oil price is sustained at anything like the current level, the damage to global growth - across both the developed and the developing world - will be substantial," he said.
The only good news is that weakening global growth and slowing spending and borrowing in Australia could convince the Reserve Bank to leave interest rates on hold until year's end.
"I doubt that the Reserve Bank will feel the need to tighten again this year, given the ongoing slowdown in local demand, and the fact that the whole of the OECD, led by the US economy, continues to weaken under the weight of … the extraordinary surge in fuel prices," Mr Robertson said.
One reason for the steep rise in oil prices is the fear of a supply shortage in the wake of Israeli Deputy Prime Minister Shaul Mofaz's reported threat to attack Iran if Tehran does not abandon its nuclear program.
Another reason is China's demand for extra diesel to stockpile before the Beijing Olympics, and to replace coal-fired electricity lost due to the Sichuan province earthquake.
Meanwhile, Nigerian workers are also threatening to go on strike at Chevron operations in the oil-rich West African nation.
The oil price rises have bitten deeply in the US, where the world's largest economy suffered its biggest jump in unemployment for 22 years, intensifying fears of a looming recession.
Australian Automobile Association director of research and policy John Metcalfe said the latest oil price surge could push Australian pump prices up by as much as much as 14 cents a litre.
If predictions of prices of $US150 by July are correct, that suggests local bowser costs could rise to about $1.70 a litre within the next seven to 10 days, and above $1.80 a litre by July.
"When the next high point in the cycle is reached, you would expect at least another 10-15c/l," he said.
Petrol costs, averaging about $1.57 cents a litre in Melbourne yesterday, are a hot political issue after huge price surges, questions surrounding the Government's FuelWatch scheme, and a plan by the Opposition to cut excise by 5c/l.
In London for talks with political and business leaders, Treasurer Wayne Swan warned the coverage of an emissions trading scheme should be "as broad as possible," hitting out at his Opposition rival, Malcolm Turnbull, for suggesting fuel should be excluded.
"We will be publishing a green paper next month which will open the discussion about this question," Mr Swan said.
In a proposal that could render squabbling over fuel tax reductions irrelevant, The Sunday Age believes the petrol excise regime could be dumped and replaced with a new system of charges based on environmental, social and economic damage inflicted by different vehicles and road use.
The plan, which has strong backing from motoring groups that will argue the case in Canberra in coming weeks, will be considered as part of the Government's much-anticipated tax review, headed by Treasury secretary Ken Henry.
RACV director of public policy Brian Negus said his organisation would press the Government "as a matter of urgency" to review the regime and consider a comprehensive road user charge based on environmental, infrastructure and safety costs associated with road use. Access Economics director Chris Richardson backed the plan.
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