The oil shock that could upend the election year
Tuesday, 10 March 2026
ANALYSIS: The thing that many people feared for years in the wake of a war with Iran has finally come to pass.
The Strait of Hormuz is all but closed, and the oil price, which had been steadily climbing, has shot up through $US110 per barrel (it was $US117 at the time of writing).
In fact, at times it has climbed more than 30% in a single day — on a product that is an input cost in virtually everything across the world and in the New Zealand economy.
The day before the war began, West Texas Intermediate was $US67 per barrel. Since the beginning of the war the price has shot up by 75%.
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In the early days of the war, the question was when US President Donald Trump would decide to pull up sticks, declare victory and move on to something else. As the war has continued, two things have happened.
First, Trump is decidedly not upping sticks and has doubled down on the conflict until Iran’s unconditional surrender (whatever that means).
The second is that Iran has produced a fightback strategy reportedly called Operation True Promise IV, in which it has begun retaliating and striking targets right across the Gulf region, including oil infrastructure, military bases and, latterly, desalination plants (which Israel also targeted within Iran).
The Gulf is under attack. The Iranian regime has nothing to lose.
As with any conflict, it takes two to tango. Not just Trump, but also Iran must decide to stop — and that does not look like happening any time soon.
Iran’s goal now appears to be to inflict the maximum possible costs on America and its allies in the region, in the hope that the fair-weather United States, with its easily distracted leader, might pack up and go home.
But based on Trump’s rhetoric, that is unlikely — while Iran is steadily blowing up whatever tolerance it had among the Gulf states. Should the regime survive, based on past performance, it would likely be more suspicious, more paranoid, more repressive — and possibly less stable.
And the more energy infrastructure gets damaged, the more needs to be repaired - and those repairs paid for.
Into all this waded Prime Minister Christopher Luxon and Finance Minister Nicola Willis on Monday afternoon. Luxon, fresh from a round of media speculation about his leadership after a bad poll, and Willis after spending last week warning she was keeping a close eye on the war and receiving twice-daily briefings.
She outlined the most recent Treasury briefings she had received, which showed some upside for the Budget compared with the half-year update delivered in December — before adding that if the war drags on, that will likely look a lot worse.
When pressed on whether she had been given any scenario forecasts for inflation, she quite reasonably pointed out that there was a huge range — no doubt depending on the duration of the war, how long the Strait remained closed, and how many oil facilities were shut down or damaged. But one bad scenario suggested it might add 0.5% to 1% to inflation.
In other words, inflation would almost certainly rise again — possibly well outside its target band.
As Willis said, this conflict and its downstream consequences are not good news for anyone. It is now a question of how bad it gets.
Because the price rises are based on real constraints — reports of oil fields in Iraq and Kuwait closing, the obvious choke point in the Strait of Hormuz, and the rest of it — they likely reflect reality for as long as the conflict continues.
For the Government — and the country more generally — a protracted conflict will be bad. Inflation will be up, growth will be down.
The reason that is so tricky is that the Reserve Bank, which might otherwise cut rates in the event of a downturn, will not be able to if inflation has also risen. In fact, it might even have to hike interest rates at the same time growth is falling.
And it is a cost that flows through to New Zealanders pretty quickly. Should the per-barrel price remain in the $US110 to $US120 range, you can expect $3-per-litre petrol as standard.
While Willis was asked about a temporary cut to fuel excise — which Labour brought in in the wake of Russia’s invasion of Ukraine — she said it was possible but implied it was unlikely. And rightly so. Cutting fuel excise — which helps pay for upkeep of current and new roads — would just mean the money had to be found somewhere else.
And while Luxon and Willis talked about New Zealand being in better nick to ride out this shock than might once have been the case — a good thing — the fact is the books are still a mess. Debt has continued to rise and, after nearly 18 years of shocks since the global financial crisis, New Zealand is in a state of disrepair.
The longer this conflict drags on, the more it will weigh on the election year, the economy and the politics of 2026. And it could well mean that the cost of everyday consumables rises — yet again.
We were already going to have the second cost-of-living election in a row. If the war drags on, it might lift New Zealand’s already febrile politics to a whole new level and upend election year.