Oil, LNG and KiwiSaver: What the US–Iran conflict could mean for New Zealand’s economy, and what the Government is watching

By Mandy Te and Anna Whyte

As the impact of the conflict between the United States-Israel and Iran continues to spread through global financial markets, the potential flow-on effect for New Zealand stretches beyond foreign policy to petrol prices, KiwiSaver, and long-term energy security.

While the Government insists fuel supplies remain secure and market reactions have been relatively muted, Labour is warning the situation underscores the risks of reliance on imported gas.

Prime Minister Christopher Luxon also confirmed on Tuesday that New Zealand has no plans to join the US in the conflict against Iran.

Oil

Finance Minister Nicola Willis said the New Zealand Treasury and Reserve Bank were monitoring economic developments closely.

“From an economic security perspective, New Zealand has very good fuel supplies,” Willis said, adding New Zealand has a 28-day supply of fuel in the country.

“We wouldn't expect to see [an] immediate impact at the pump. We will be monitoring changes in the oil price closely."

Willis said that “when the markets reopened, we did see a blip up from around $72 to $78, we do expect that there will be changes in that number, but for context, when Russia invaded Ukraine, that went up to $120 a barrel”.

Luxon said the impact on the economy would be a “wait and see” situation which would take a while to play out.

"Obviously you've seen traffic through the Hormuz Strait start to drop, but to be honest, the reaction in the markets, and even in the oil market, it went up 10% [which] is pretty muted when you think about where the price of oil is and where it has been in the past."

A significant quantity of liquefied natural gas (LNG) and about a fifth of the global oil supply by sea passes through the Strait of Hormuz, a narrow passage between Iran and Oman. Any blockages could have severe effects on oil prices.

“We just need to stay calm and actually just work our way through and see what the impacts will be. But certainly the market reactions have been pretty muted," Luxon said.

LNG

Labour leader Chris Hipkins said the situation highlighted “how wrong the Government are to pin New Zealand's energy future to the international price of LNG”.

The Government last month announced it would build a LNG import terminal as soon as 2027 to remove the risk associated with dry years. LNG is natural gas that has been cooled and liquified so it can be transported easily.

“Now is the time when we should be looking for much more energy independence, because these sorts of shocks, particularly if we become more dependent on LNG as a source of electricity, are likely to continue to affect New Zealand in the future,” Hipkins said, later hinting his party would have more to say on solar ahead of the election.

On LNG, Willis said she was; “actually living in the real world, which is that gas security and ensuring that we can generate electricity when the lakes are low and the sun isn't shining is critical to both the affordability and security of electricity and supply in New Zealand”.

“Anyone who says, in the future, New Zealand won't need oil, needs to go and talk to every Kiwi who fills up at the pump each week.”

Trade

Trade Minister Todd McClay said the foreign affairs ministry and other agencies were talking to exporters, but it was too early to say what they effects might be.

It was interesting that overnight the US stock market was down marginally and hadn’t moved much, he said.

“But of course, it’s a challenging time for exports… There won’t be any goods or services going in and out at the moment, McClay said.

“We know that some shipping is likely to be affected. We’re seeing that in and around the Gulf. We have about $3 billion worth of exports into those GCC (Gulf Corporation Council) countries and a few others."

Fertiliser

Labour’s finance spokesperson Barbara Edmonds says in terms of gas, another thing to keep an eye out for are the impacts of that on nitrogen fertiliser.

The Middle East is one of the largest producers of nitrogen fertiliser in the world.

“New Zealand depends on nitrogen fertiliser," Edmonds said. Nitrogen can be applied to dairy and cropping farms, and a small number of dry stock farms, according to the Fertiliser Association of New Zealand.

"We are a food-producing nation so ultimately there may be some impacts that flow through to food production."

KiwiSaver

Pathfinder KiwiSaver chief executive John Berry said it was important to recognise KiwiSaver funds are diversified - meaning they are across industries, sectors and countries.

“And that is a great way of reducing risk … there’s already in-built risk reduction,” Berry said.

KiwiSaver is designed as a long-term savings scheme, Berry said, and short-term volatility in markets will happen.

“That’s just part of investing but the key thing is for every investor to make sure that their personal risk profile is aligned with the time horizon of the fund they’re in.”

“So if they have a long-term time horizon, they should just ride out the volatility. If they have a short-term time horizon, they should be in a more conservative fund so they don’t feel the impact of the volatility,” Berry said.

Market reaction

In terms of market reaction, gold had gone up which was expected as people seek safe havens when there’s risk and oil had gone up, Berry said.

“The surprise for me is that equity markets have been flat and have been quite relaxed about the turmoil."

Berry said he was a bit perplexed because of the VIX (the volatility index), as the VIX index was twice as high in April last year - when US President Donald Trump announced his sweeping tariff plan.

“Where it is at the moment is about the same as it was in June last year when the US bombed Iran,” Berry said.

The current conflict was different because that was seen as a short-term and the current attack was a much wider conflict, he said.

“It is going to drag on for longer and it’s hard to really know why markets are relaxed about it at the moment.”

Berry speculated that potentially markets expected the disruption to be contained and “something has just changed in the way we perceive risk and that we’re less worried about dramatic events”.

Inflation

For inflation, Willis said they were again monitoring the situation, and was confident the Reserve Bank and Treasury “have both the mandate and the tools to make good decisions here”.

“Obviously, not all the data is in yet. They do have an update coming in April, and that will provide a juncture at which they can offer a full reflection on the data and the developments and set out their decisions accordingly.”

So, where to from here? And what about inflation?

Berry said to answer that, we need to think about what happens in Iran, how prepared they are to negotiate, how destabilising these events are and how much they want to retaliate.

“And secondly, how great is the disruption globally to oil infrastructure and shipping," Berry said.

But if the war is prolonged, he said, the economic impact will be on inflation.

“With an elevated oil price, we’ll feel it at the pump and if we feel it at the pump, it will filter down to other parts of the economy."