The ongoing conflict in the Middle East, particularly the closure of the Strait of Hormuz, is causing significant concern for New Zealand's fuel supply and economy. Finance Minister Nicola Willis has revealed a worst-case scenario where inflation could rise to 3.7%, a figure that is lower than Australia's current inflation rate of 3.8%. This vulnerability highlights New Zealand's reliance on fuel imports from Asia, which in turn depends on Middle Eastern crude oil. The situation is further complicated by the potential for Asian fuel refineries to face challenges in securing their fuel stocks, as they are heavily dependent on the Middle East for their supplies.
One of the key concerns is the possibility of fuel importers facing difficulties in securing orders, which could lead to a disruption in the supply chain. This, in turn, could result in a rise in fuel prices and have a flow-on effect to the prices of other goods, causing inflationary pressures. The government is closely monitoring the fuel price and considering whether an intervention is necessary. However, any intervention would be 'timely and targeted', as recommended by the Covid Royal Commission, rather than a blanket fuel tax cut.
The current situation has led to a 'minor' impact on the fuel sector, but there are concerns that this could escalate. The government is taking a proactive approach by monitoring the situation, communicating with fuel importers, and planning for potential escalation. However, no mandatory demand measures are yet necessary. The government has a range of tools it can use to manage supply pressures and keep essential services running, but these steps would only be taken if genuinely needed.
The potential for economic impacts extends beyond just the supply and price of fuel. When fuel prices rise, it can have a flow-on effect to the price of other goods, causing inflationary pressures. The Finance Minister has acknowledged the potential for inflationary effects, but has also noted that New Zealand is starting from a stronger position than other countries, such as Australia. The impact on inflation could be between 0.4-1%, depending on the length and impact of the war.
In terms of GDP, the New Zealand economy is still forecast to grow this year, but by a smaller amount than previously expected. The potential impact could be between 0.1 and 0.5 lower than previously thought. The government is working to get more timely updates of fuel stocks and is reassuring New Zealanders that there is sufficient supply. However, there have been reports of high demand at some petrol stations, indicating that the situation is not without its challenges.
The ongoing conflict has also led to calls for countries to send ships to help secure the Strait of Hormuz. New Zealand has not been formally asked to send a ship, but if it was, there would be a discussion first at Cabinet. The government is taking a cautious approach, ensuring that any intervention would be 'timely and targeted', and that the country is prepared for any potential escalation in the situation.
