New Zealand’s economic recovery is delayed but intact as the oil shock forces a rethink of the Budget
Finance Minister Nicola Willis has told New Zealanders that the country’s economic recovery is “delayed, but not derailed”, as Treasury releases three distinct scenarios for where the economy could end up depending on how long the Middle East conflict and its oil shock run.
The update, delivered as petrol prices nationally average more than $3.30 a litre and Brent crude sits above US$100 a barrel, puts concrete numbers on the range of outcomes New Zealand faces. In the mildest scenario, where oil settles around US$110 a barrel, annual inflation reaches 3.9 per cent, GDP grows at 2.0 per cent and unemployment sits at 5.3 per cent through 2026. In a middle scenario involving a prolonged conflict and oil around US$135, inflation climbs to 5.2 per cent, growth eases to 1.5 per cent and unemployment edges to 5.4 per cent. Under the worst case, with oil at US$180 a barrel, inflation hits 7.4 per cent, GDP growth falls to just 0.8 per cent and unemployment reaches 5.7 per cent.
Willis described the worst-case figure as “extremely unlikely” but acknowledged the numbers are substantially worse than Treasury’s previous worst-case projection of 3.7 per cent inflation, published just weeks earlier. The last time New Zealand inflation reached anywhere near 7.4 per cent was June 2022, when the post-pandemic surge peaked at 7.3 per cent.
For context, the most recent inflation data showed the Consumers Price Index rising 3.1 per cent in the 12 months to March 2026, a figure that came in above most economists’ forecasts and has lifted the probability of an Official Cash Rate increase at the Reserve Bank’s May meeting. The economy had been expected to recover steadily through 2026 on the back of lower interest rates and renewed consumer confidence. The oil shock has upended that timetable.
The crisis has its roots in the effective closure of the Strait of Hormuz, the narrow passage between Iran and Oman through which roughly 20 per cent of all global oil shipments flow. The disruption sent crude prices past US$100 a barrel and immediately created pressure on the countries most dependent on imported oil — a category that firmly includes New Zealand. Since the closure of the Marsden Point refinery in 2022, New Zealand has relied entirely on imported refined fuel, sourced mainly from refineries in Singapore, South Korea and China that themselves depend on crude oil that travels through the strait.
Prime Minister Christopher Luxon described the situation as “one of the most significant oil shocks we’ve had in history.” Willis, for her part, confirmed the government’s fuel buffer stands at roughly seven weeks of supply, but noted that the buffer “relies on ships like this continuing to turn up.” The government has already committed $21.6 million to building up diesel reserves at Marsden Point as a direct response to the supply risk.
University of Otago economist Murat Ungor has highlighted that diesel presents a “bigger economic problem” than petrol, given that it powers the trucks, tractors and fishing vessels that underpin New Zealand’s supply chains and agricultural exports. Road transport accounts for nearly 40 per cent of national energy use, and with electric vehicles comprising only around 3 per cent of the light vehicle fleet, any sustained rise in fuel costs flows almost immediately into the prices of food, freight and farming inputs.
For households, the impact is already tangible. Prices at the pump have exceeded $3.30 a litre across the country, with remote areas hit harder — stations on Waiheke Island have exceeded $4 a litre, prompting community protests. The government has responded by extending cost of living support to approximately 143,000 working families with children, providing $50 per week through the in-work tax credit at a total estimated cost of up to $373 million.
The shock has also reached corporate New Zealand. Air New Zealand has suspended its earnings guidance and warned of fare increases as jet fuel costs climb. The airline’s decision underscores how the oil price rise ripples beyond the petrol station into the broader economy, affecting tourism, logistics and consumer spending.
Treasury is now reopening its economic forecasts with the Budget just over a month away, a significant development given the complexity of building a spending plan on shifting foundations. The exercise is likely to reshape several key assumptions in the fiscal programme, including revenue projections tied to GDP growth and expenditure decisions about how much further support is warranted.
Willis acknowledged there is some reason for cautious optimism. “Events of the past few weeks provide some cause for optimism, albeit with ongoing volatility,” she said, referring to some easing in oil prices from their peaks and diplomatic activity aimed at stabilising the Middle East situation. The government’s position is that the three Treasury scenarios bracket the realistic range of outcomes rather than predict a single path, and that sitting closer to the mild end remains plausible.
The larger structural issue exposed by the crisis is one that has been debated for years without resolution. New Zealand’s extremely high car dependency — 815 light vehicles per 1,000 people, among the highest in the world — and its complete reliance on imported fuel leave it unusually exposed to exactly this kind of external shock. Whether the current disruption accelerates any change to those fundamentals, in policy or in consumer behaviour, is an open question.
For now, the Finance Minister’s message is one of managed uncertainty. The recovery remains the destination, but the road has lengthened and the fuel to travel it has never been more expensive.
What do you think — is the government doing enough to cushion New Zealanders from the oil shock, or should more be done to accelerate the shift away from fuel dependence? Leave your thoughts in the comments below.