Iran War: Oil shocks are back - here’s why New Zealand should worry
Sunday, 15 March 2026
Brad Olsen is chief executive and principal economist, Infometrics.
OPINION: The world is a more frightening, uncertain place than we’d all hoped it would be. And, pragmatically, that’s not changing any time soon.
Middle East conflict has sent oil prices soaring, and we’re now getting uneasy here at home about the risk of running out of the all-important black gold. You know it’s bad when we’re reaching back to Muldoon-era government orders for ideas.
It could’ve been an even starker challenge. Over time, the New Zealand economy has become less exposed to oil overall. Infometrics analysis shows that, on a per-person basis, oil consumption use across the economy has fallen 17% in the last 20 years, after hitting a high point in 2005.
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The proportion of overall household spending on petrol, for example, has fallen from a peak of 5.5% in the late 2000s, to 3.5% in 2024. We have more efficient vehicles, and more EVs and hybrids in the fleet. That doesn’t lessen the hit to people’s wallets that recent hikes at the pump have produced, but does reinforce that it could’ve been even worse.
The wider worry for the economy is industry – fuel, and in particular diesel, is a vital input across a range of sectors, to both move people and goods around, and to help run the machines that provide food, and just about everything else.
In 2024, there were seven industries where oil-based fuel costs made up more than 5% of non-wage operating costs. Unsurprisingly, planes, trains, ships, and trucks were up the top, with 18-27% of operating costs coming from fuel. But other parts of production will be hit with higher costs too, including horticulture, agriculture, construction, manufacturing, and local councils as fuel, fertiliser, plastic pipes, and bitumen costs all rise.
Such an economic hit couldn’t come at a worse time, as the fledging economic recovery continues to gain momentum. Usually, an oil supply shock causes two things to happen.
First, headline inflation rises as petrol and diesel prices rise – as well as some pass-through on transport costs to a range of other goods. Second, households and businesses have to spend more on fuel and therefore have less to spend on other parts of their budget, resulting in lower demand for other goods.
Those two factors usually allow a central bank, like RBNZ, to “look through” shocks, as there’s some direct oil-based inflation pressure, but less other-product pressure. Although expectations for interest rates are uncertain, the outlook for GDP growth is for a more sluggish recovery, with higher costs a drag on businesses.
We know that New Zealand’s position as a small island nation at the bottom of the South Pacific can be a blessing and a curse. We’re far away from conflict directly, but we’re also at the end of supply chains, and an easier part of the path to skip if the pressure is on. Last year, Infometrics profiled where New Zealand’s fuel actually comes from – the crude is sourced from the Middle East, and then refined predominately in South Korea and Singapore.
Some quarters seem to simplistically think that still having Marsden Point operational could have avoided the current predicament. Conveniently forgetting that, while it could process crude oil into fuel, you’d need to access the crude oil first – which would’ve still been stuck in the Middle East. And even if we could circumvent our current key refining suppliers in South Korea and Singapore, we’d be making an almighty bet that crude oil would be prioritised to little old New Zealand when those bigger Asian oil refineries are hanging out for it too.
The options in the short term are limited – higher prices are deeply uncomfortable, but other policy responses might well be even more irresponsible. Carless days and the like are easy enough to get around, and any cuts to fuel excise duty to lessen the hit would – again – be extremely dumb economic policy. Instead, households and businesses will make logical choices, reducing non-essential travel, switching to public transport, carpooling, and working from home more.
Longer term, we clearly need better options to limit our exposure. Supply chains remain vulnerable, and the “just in time” supply system – for almost everything – now appears to need more redundancy built into the system, with some spares available as part of a “just in case” model. We likely need to consider overbuilding capacity in our fuel and energy system to allow for that extra safety margin contingency.
I’d argue that, alongside some large fuel tanks, overbuilding our renewable energy options makes sense too. Focusing more on renewables that we can access immediately here at home, like solar, wind, more hydro, and in the future supercritical geothermal – all with a battery attached – can help us become more self sufficient and less beholden to being at the end of a vulnerable supply chain. It’ll cost, but it’ll add a lot more to the local economy than buying additional more imaginary “oil tickets” with countries overseas, or simply holding more Middle Eastern oil here at home.
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