NZ Petrol Prices: Don’t Panic – Supply Issues & Economic Outlook Explained

Petrol prices in New Zealand are facing renewed upward pressure as geopolitical tensions in the Middle East and potential supply chain disruptions raise concerns about a potential inflationary impact. Finance Minister Nicola Willis has indicated the government is focused on addressing supply chain vulnerabilities and anticipating potential freight disruptions, but cautioned against panic.

The concerns echo anxieties from early 2022, when a spike in gasoline prices coincided with already high consumer price inflation in the United States, sparking fears of an inflationary spiral, according to research from the Federal Reserve Bank of Kansas City. That research, published in November 2022, assessed whether high inflation makes consumers’ expectations more sensitive to fluctuations in gasoline prices. The study found that individuals with higher initial inflation expectations revise their one-year-ahead inflation forecasts more significantly in response to increases in gasoline prices.

Currently, petrol prices in New Zealand have risen by 45 to 50 cents per litre, adding approximately $23 to the cost of filling an average car. Treasury modelling suggests inflation could reach 3.7% under a “worst-case” scenario. Liam Dann, business editor-at-large for the New Zealand Herald, noted the situation is unfolding against a backdrop of economic fragility following the Covid-19 pandemic.

Dann argues that while the current supply shock is acute, it stems from logistical and transportation issues rather than a fundamental lack of oil. He points out the sheer scale of global petrol production – 5.98 trillion litres annually, equivalent to 2.4 million Olympic swimming pools – compared to the 194 billion litres of beer produced worldwide. This scale, he suggests, mitigates the risk of prices doubling from current levels of US$96 to US$119 per barrel for Brent Crude Oil, despite recent attacks on oil-producing infrastructure in the Middle East.

Despite the potential for prices to reach US$200 ($340) a barrel, pushing local pump prices to $4 a litre, Dann believes such a scenario is not inevitable, given that worst-case scenarios are already factored into trader calculations. He acknowledges the uncertainty, but suggests a tendency towards catastrophizing could be self-fulfilling, mirroring patterns observed during the Global Financial Crisis and the Covid-19 pandemic.

Minister Willis is reportedly attempting to balance transparency about potential risks with the require to avoid inducing panic, a strategy Dann views favorably. The government is holding daily meetings and receiving twice-daily situation updates, working closely with importers to monitor the situation.

The situation is being closely watched for its potential to amplify inflationary pressures, particularly given elevated consumer inflation expectations. Research suggests that consumers with pre-existing higher inflation expectations are more likely to react strongly to price increases, potentially creating a feedback loop.

Though, some analysis indicates that gasoline price shocks have not demonstrably shifted long-run household inflation expectations, according to a study published in ScienceDirect.com.

The government’s response will be critical in navigating the coming months, as the oil supply chain faces significant challenges. Minister Willis has outlined a focus on supply chains and potential freight disruptions as key priorities.