NZ Households Face $4,000–$6,000 Hit if Fuel Prices Stay Elevated

Dr Eilya Torshizian

The escalation of conflict in the Middle East, and the associated risks to shipping through the Strait of Hormuz, have renewed concerns about New Zealand’s exposure to global fuel supply disruptions. As discussed in our earlier analysis, the Strait remains a critical chokepoint for global oil flows. Even partial disruption can transmit rapidly into domestic fuel prices, given New Zealand’s reliance on imported refined fuels. Since the onset of hostilities on 28 February, domestic fuel prices have risen from approximately $2.65 per litre to $3.32 as of 23 March—an increase of 67 cents. This raises an immediate policy question: what is the economic cost of such an increase, and how persistent might these effects be?

The duration of the conflict remains highly uncertain. Historical experience suggests that conflicts expected to resolve quickly can persist far longer than anticipated, while repeated signals of de-escalation often prove temporary. The risk is not limited to shipping disruption alone. If refining infrastructure in the Middle East were to be damaged, supply constraints could become more structural, prolonging elevated fuel prices well beyond the immediate conflict period. Under such a scenario, New Zealand would face sustained cost pressures rather than a short-lived price spike.

In earlier peer-reviewed work, we were commissioned to estimate the economic impacts of transport pricing using our static subregional CGE model (PE-CGE). This model represents 88 areas across New Zealand, drawing on a detailed database covering 67 territorial authorities and 21 Auckland local board areas. The key advantage of this regional CGE framework, relative to a national model, lies in its ability to capture spatial heterogeneity—allowing us to assess how region-specific shocks propagate across the economy. The PE-CGE model adopts a bottom-up structure, linking independently specified regional economies through trade and primary factor markets. Prices and quantities are determined separately within each region, enabling a detailed representation of cross-regional interactions and spillovers into national outcomes.

While the full results of that work are not yet public, the model provides a robust basis for scaling the economic implications of fuel price changes. Applying these relationships suggests that a 1 cent increase in fuel prices reduces New Zealand’s economic output by approximately $49 million to $78 million per year, with a central estimate of around $56 million. Extending that relationship to the observed 67 cent increase implies substantial economywide impacts, as summarised below.

Estimated annual economic impact of current fuel price increase (67 cents)

These estimates indicate that the current fuel price increase is associated with an annual economic cost of approximately $8.7 billion, with a plausible range of $7.6 billion to $12.2 billion. Importantly, these figures reflect real economic losses—reductions in productive efficiency and purchasing power—rather than fiscal transfers. Environmental benefits arising from reduced emissions and transport demand may offset part of these costs. Based on earlier analysis, such benefits could plausibly account for around 20% to 25% of the total economic loss, reducing the net welfare impact but not eliminating it.

Current indications suggest the conflict will persist for at least several more weeks, raising the likelihood that elevated fuel prices will continue. At current levels, the associated economic cost is estimated at approximately $8.7 billion per year, with a plausible range of $7.6 billion to $12.2 billion. This is equivalent to around 2% of New Zealand’s GDP, or roughly $4,000 to $6,000 per household annually. This per-household figure assumes that current fuel prices are sustained for a full year; if prices ease sooner, the realised impact would be proportionally smaller. It is also important to note that these estimates capture not only direct financial costs—such as higher fuel and transport expenses—but also indirect economic losses. These include forgone opportunities where businesses defer investment, reduce production, or scale back expansion because higher operating costs make some activities uneconomic. Households may also reduce discretionary spending, which weakens demand in sectors such as retail, hospitality, and services. Even allowing for environmental benefits—potentially offsetting 20% to 25% of these losses—the net impact remains significant, particularly if disruptions to global fuel supply persist.

So what does this mean for policy?

The central value of these estimates is that they quantify the economic cost of fuel price shocks, turning an abstract risk into a measurable trade-off. An estimated loss of around $8 billion to $9 billion per year provides a benchmark against which policymakers can assess whether intervention is warranted. For example, if mitigation measures—such as temporary tax relief, support packages, or strategic fuel management—can materially reduce this loss at a lower cost, then intervention may be justified. Without such estimates, it is difficult to determine when action is proportionate or efficient.

These results are also directly relevant for energy security and contingency planning. Even if current policies focus primarily on households, understanding the economywide cost helps identify where constraints would be most damaging if the situation escalates. In more severe scenarios, this information becomes critical for designing targeted responses—whether through prioritising essential services, maintaining freight and supply chains, or avoiding blunt restrictions that impose unnecessary economic costs. In parallel, the magnitude of the estimated losses strengthens the case for longer-term resilience investments, including reducing fuel dependence and improving transport efficiency.

Finally, the estimates provide a practical tool for forward planning across government, businesses, and households. For policymakers, they inform fiscal and monetary responses to a large external shock. For businesses, they indicate the scale of potential disruption and support decisions around investment, pricing, staffing, and supply-chain management. For households, they clarify that the impact extends beyond the petrol pump to broader economic conditions, including prices, wages, and employment. In this sense, the estimates are not merely descriptive; they help align expectations and guide a more coordinated response to a potentially persistent shock.