Oil prices have spiked dramatically in early trading this morning, breaking through the US$100 mark for the first time since 2022.
Brent crude oil – trading as high as US$118 on Monday afternoon – is now up more than 50% since the first bombs fell.
It has risen more than 20% today alone.
Kiwibank chief economist Jarrod Kerr warned that the oil shock was badly timed for New Zealand’s economic recovery.
“A spike in the petrol prices acts like a tax on the consumer,” he said.
“Unfortunately, things are likely to get worse before they get better. We’re bracing for much higher volatility, with a bigger market reaction in the near term.”
The NZX50 has dipped around 3% in trading today, wiping about $5.5 billion off the market capitalisation.
Asian markets fared worse with Japan’s Nikkei and Korea’s Kospi down by more than 6%.
BNZ head of research Stephen Toplis lifted his forecast for inflation and described the economic scenario as “the worst of all worlds for the average New Zealander.”
“It’s very disconcerting when you find yourselves revising up your inflation forecasts while the balance of risk is that you will soon be revising downward your growth predictions,” he said.
“It also poses a dilemma for our central bank. Moreover, it’s unlikely to be welcomed by an incumbent government fighting what looks likely to be a very tight election.”
BNZ still expects that first-quarter inflation will ease to 2.8%, but from there it will rise back to 3% in June and stay there for the rest of the year.
The world had been enjoying a period of historically low oil prices through to early January, with Brent crude trading as low as US$59.
So, in the relatively short period since the end of the Christmas holiday break on January 8, the oil price has almost doubled.
The AA suggests a simple equation for the impact on retail petrol prices is 10c a litre for every US$10 a barrel.
Petrol prices started to flow through to the pump at the weekend.
Consumer website Gaspy has the national average price of 91 octane at $2.64 a litre and 95 octane at $2.82c a litre.
That is currently an increase of about 2.5% in the past four weeks, suggesting the worst is yet to come for motorists.
Markets are reacting to the ongoing closure of the Strait of Hormuz, through which some 20% of the world’s oil passes.
US President Donald Trump said the military will ensure the Strait stays open, but there is still no timeline for that.
US investment bank JP Morgan has forecast that prices of US$120 a barrel are likely if the Strait stays closed.
Input costs were going to go up across the board for firms, Kiwibank’s Kerr said.
“But in an already fragile demand environment, not all businesses will be able to pass on the costs to consumers.
“It will be uneven. Sectors like retail and construction, which are amongst the weakest, will struggle to pass through higher costs.”
“Mixing together tighter margins, falling profitability, and a shell-shock wave of uncertainty, businesses would be more likely to pull back on investment, hiring, and growth-oriented decisions … reinforcing a weaker growth environment.”
For now, central banks, including the Reserve Bank of New Zealand, would be expected to look through a short-term rise in inflation, economists said.
“Sure, the central bank can, and should, look through a supply-driven oil price shock,” BNZ’s Toplis said.
“But there will be other price pressures emanating from the Middle Eastern conflict to contend with such as the second round effects of the oil (and gas) price increases, the upward pressure on other commodity prices (even things like dairy), increased freight costs as high-risk routes are avoided, and rising airfares.”
Looking to the medium‑term (where monetary policy is targeted), the weakening growth outlook may ultimately matter more than inflation, Kerr said.
“We suspect central banks, and the RBNZ in particular, may well have to tolerate higher inflation in the short run to avoid tightening into a slowing global economy.”
That was the biggest headache for the Reserve Bank, Toplis said.
“Does it adopt an easier monetary policy stance because of lower growth, or does it adopt a tighter stance because of rising inflation?”
It would come down to how much the Bank was willing to look through the short-term shock, what assumptions it made as to the longevity of the shock and how much weight it put on the actual data (rising inflation) as opposed to forecasts of lower growth and lower medium term inflation.
“This is a conundrum faced by central banks across the planet but New Zealand’s starting point of rising inflation expectations, inflation outside the target band, and likely ongoing elevated inflation, even in the face of what looks to be weaker-than-expected growth, makes the task that much more difficult,” he said.
ASB senior economist Kim Mundy also described the initial oil shock as a tax on consumers.
“Higher petrol prices reduce households’ ability to spend elsewhere,” she said.
“The recovery in household spending was already expected to be more muted than in other upturns given the still-subdued housing market.”
If and when price impacts spread further, they could further erode households’ disposable income, she said.
The implications for manufacturers were also worth watching.
“New Zealand’s manufacturing industry was hit hard not only by the general economic slowdown, but New Zealand’s own energy crisis in 2024,” Mundy said.
It’s output remained well below the peak in the second quarter of 2022 (in GDP terms).
“It remains to be seen how equipped the manufacturing sector is to absorb more cost pressures, especially if demand takes a hit at the same time,” she said.
“We will also be monitoring how confidence measures (both business and consumer) fare.”
The best-case scenario from here was a quick resolution to the conflict, said KiwiBank’s Kerr.
“Our hope is that markets rebound quickly once the dust settles, as they did in 2022 following the Russia and Ukraine crisis period,” Kerr said.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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