Inside Treasury’s oil shock modelling as officials attempt to map fast-moving conflict scenarios

Treasury has outlined details of its oil shock scenarios, as a rapidly evolving Middle East conflict makes it harder to pin down where inflation could land.

Interest.co.nz asked Treasury for details of all the aspects it was looking at in regards to crisis scenarios it's providing Finance Minister Nicola Willis - ie. length of the conflict, level of supply, restrictions on other products and potential charges on ships in the Strait of Hormuz.

Chris Bunny, Treasury’s deputy secretary of Budget and fiscal performance, said the Middle East situation is highly uncertain.

“In constructing economic scenarios for the current oil shock, Treasury’s starting point was New Zealand’s economic and fiscal situation, including Treasury’s HYEFU [Half Year Economic and Fiscal Update] forecasts.

“Treasury worked with relevant agencies across Government [to] map out plausible paths for the conflict, including duration and associated implications to fuel supply and price supply and price," Bunny said.

“From there, we organised our judgements around a framework that required us to consider, under each scenario, how global demand might be affected and what that would mean for trade and markets, alongside other potential responses, as well as how global inflation might affect import prices more broadly.”

“Treasury’s next set of forecasts will be released with Budget 2026.”

The uncertainty from the volatile situation has flowed through to ministers’ inflation messaging.

Nicola Willis briefed journalists in mid-March of Treasury forecasts of 3.7% inflation in a “worse-case scenario” based on a prolonged conflict lasting the rest of the year, with oil prices continuing to rise. That figure was met with skepticism from the likes of Westpac economist Kelly Eckhold who said 3.7% was likely closer to baseline.

Then, a few weeks later, Willis said Treasury’s latest scenarios, “in which they take into account a longer conflict with deeper disruption to supply chains, they have inflation peaking higher than I've previously presented to you”.

“But they are continuing to refine their scenarios and their planning.”

Since then Willis has not presented forecast inflation figures.

Willis said at the time Treasury caveated their advice on the length of the conflict, the timing of the Strait of Hormuz reopening and the level of disruption to supply chains.

Asked if Treasury was forecasting inflation heading up, potentially to around 7%, Willis said last week that Treasury had not yet formed a view of what their scenarios would mean for inflation forecasts.

Phase three and four shapes up

Prime Minister Christopher Luxon told journalists on Monday New Zealanders and industry would have clarity on the details of the more serious levels of the fuel response plan - phase three and four - in the next few weeks. The country is still at phase one. 

When details of the fuel plan phases were announced two weeks ago, Willis said the Government would be consulting for the next two weeks with industry, fuel users, and local government on phase three and four implementation.

Luxon said 2000 submissions had come in, as well as a series of forums with diesel and petrol users, fuel importers and key stakeholders and; “we need to digest all of that and make sure that we can put more definition to phase three and phase four”.

“The vast majority of that feedback came from sector groups or businesses.”

Luxon said the Government was focused on how they will operate regionally versus nationally, and the distinctions between petrol and diesel bands.

“Looking ahead, officials are analysing all that feedback and continuing engagement with fuel suppliers and users to support the design of an industry led approach. Ministers will then make decisions on updates to the plan, informed by that feedback and also official advice.”