Iran War: The oil shock New Zealand can’t afford
Saturday, 14 March 2026
Luke Malpass is politics, business and economics editor.
OPINION: It is always the things you take for granted. Being able to travel in and out of the country. Being able to get Gib. That the price of petrol won’t rise too much. And that petrol keeps flowing.
It is no small irony that in the week we were all reminded of Covid-19 with the release of the final report of the clunkily named NZ Royal Commission Covid-19 Lessons Learned – the next crisis may already be upon us.
That crisis is the economic fallout from the war in Iran. It won’t be like Covid-19, not by a long shot. Nor will it be like the oil shocks of the 1970s. But it will, again, challenge the ability of the New Zealand state to get on top of the debt and deficits bequeathed by the global financial crisis, the earthquakes in Christchurch and Kaikōura, floods and Cyclone Gabrielle, and finally, of course, Covid-19 itself.
Since 2008, when New Zealand’s debt track shot up, it has never really recovered. It has had periods of coming down again – the late part of the Key years and early Ardern years – but mostly it has ratcheted upwards.
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The figures are stark. As a proportion of the economy, prior to Covid in 2019 net core Crown debt stood at 16%, having spent a few years heading downwards.
Fast forward seven years and net core Crown debt is now over 41% of gross domestic product and slated to go higher. Arguments over the prudence of different parts of the Covid spending aside – over which there will be debate for a very long time – that is now the reality that must be dealt with.
In dollar terms, total net core Crown debt is forecast to reach $235 billion by 2028. Assuming a population of 5.4 million, the state will be carrying more than $43,000 of net debt for every man, woman and child in the country.
And currently that debt will not start to be paid down until at least 2029 when the first OBEGALx surplus is forecast. OBEGAL is an accounting measure; there are no cash surpluses coming any time soon.
This is now a central political and economic challenge for the Government, and Finance Minister Nicola Willis in particular. Willis has been arguing for more than a year that New Zealand has run down its fiscal buffers and they need to be rebuilt — precisely to deal with shocks.
The make-up of the coalition – and Willis’ own political philosophy – means the key driver of debt, government spending, is not being tackled with any great alacrity. The dollar amount of money the Government spends – total Crown expenses – is projected to rise from $183 billion in 2025 to $199 billion in 2029.
Willis’ argument is essentially that there is not the political economy to support steep cuts – that the burden of such cuts would overwhelmingly fall on the poor and struggling and that they would likely be unwound anyway when the coalition inevitably lost office. This has been a point of tension between National and ACT.
Most of the extra spending will be absorbed by higher NZ Super costs, increased healthcare spending for an ageing population, and the increase in defence spending slated to reach 2% of GDP by 2033.
The New Zealand economy is currently worth about $440 billion. In current dollar terms, increasing defence spending from 1% to 2% of GDP means finding another $4.4 billion per year. By the time the commitment to 2% comes in 2033, that number will be significantly higher on the back of a larger economy.
Then there is the backlog in infrastructure – properly financing the maintenance and upkeep of the assets New Zealand already has, which according to the Infrastructure Commission is where about 60% of infrastructure spending should be going.
But the Government’s current Budget track – slowly repairing the fiscal position over a number of years – is reliant on economic growth returning and essentially no major shocks.
That is where the Iran conflict comes in.
No-one knows what is going to happen in the Iran conflict or at what point Donald Trump might feel he can declare victory and end the US side of the war.
But the incentives facing the Iranian regime are far more complicated – and its internal machinations are largely a black box filled with educated guesses.
Assuming regime survival is its key aim, there must be creeping suspicion that even if Trump stops from his end, the Islamic Republic may seek to ensure the costs of attacking it are so high as to heavily discourage future attacks. That most likely means disrupting trade, oil and gas through the region in a manner that drives up prices and hurts US consumers – and global consumers more broadly.
Already the war in Iran has spilled into a crisis in the Strait of Hormuz. And the Mojtaba Khamenei regime has promised more to come.
If Trump were to end the conflict there are, of course, other factors. Although Israel and the US appear to have operated largely in lockstep on this campaign, the national interests of the two countries are not the same. Iran has long been the key sponsor of groups fighting against Israel, so Israel’s view of Iran is quite different to that of the US. And there appears to be no appetite to stop any time soon from Israeli Prime Minister Benjamin Netanyahu.
This has the potential for huge disruption in a region from which New Zealand gets both fuel and fertiliser. In 2023 about 70% of New Zealand’s imported urea came from Saudi Arabia, for instance.
Incredibly, considering developments over the past four years, Saudi Aramco – the world’s third-largest company and frequently the most profitable – is reportedly considering purchasing Ukrainian drones to help protect its oil fields.
Overall, markets are now more firmly coming to grips with the longer-term implications of this conflict and the fact that it could lift costs and crunch supply for a potentially long and undefined period.
For New Zealand that means higher fuel prices and slower growth.
The best-case scenario is that this is about as bad as it gets, the war winds down and things settle over the coming months. That seems highly unlikely. The more worrying scenario is that not only do oil prices – including petrol, jet fuel and diesel – rise further, but that supplies become much harder to obtain.
The Government is clearly aware of this. Willis and Shane Jones have moved to establish a ministerial group to ensure fuel supply does not become a problem.
At present New Zealand has about 50 days’ worth of fuel, either onshore or in ships en route.
South Korea – which has a large refining industry – supplies almost half of New Zealand’s refined fuel. It in turn gets about 70% of its crude oil from the Middle East and virtually all of that oil passes through the currently choked Strait of Hormuz. South Korea is also reportedly planning to limit refined fuel exports to roughly the same levels as in 2025.
This is now a significant issue for the Government. It is increasingly a matter of looking at where the situation might be in 30 days’ time, rather than today.
The new Ayatollah and Iranian leadership have said Iran will open new fronts in the war and that Iran – not Trump – will decide when it ends. The FBI has even warned there could be drone attacks on the west coast of the United States, which would send the conflict in who-knows-what direction.
Governments can be made in crises. But this one will be a real test because it hits both leadership and the cost of living – issues that have already challenged the Government.
And it will have to be managed without making the fiscal situation markedly worse for little gain. The Government has so far resisted moving on fuel excise – a sensible call – but if supply tightens and prices rise quickly, that may be one possible response. But that would be a little like robbing Peter to pay Paul.
Willis and Jones have taken the lead on the issue.
This will not be like Covid. But yet again, the simple things that are taken for granted are at risk of being upended.
It will certainly shape the Budget – and could well shape the election year.
And who knows where we will be in a week’s time.