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.

Our report provides advice on the Government’s final decision about the second emission budget. In addition to a wide range of policies considered in our earlier (May) report, the current report further investigates the impact of:

• alternative carbon pricing policies,

• the Electrify NZ policy,

• the EV charging network investment, and

• the Carbon Capture, Utilisation and Storage (CCUS) and the Refrigerants Regulated Product Stewardship scheme assumptions.

Our high-level results suggest that:

• the high carbon price of the Fourth Pathway scenario leads to larger adverse economic and equity impacts.

• a decrease in GDP is associated with lower household consumption, lower real wages and lower exports (volume). As will be discussed, the short,
  medium and long-term dynamics of these effects are important for households (as well as the emission and
  economic outcomes).

• the emission targets are achievable, but there is a significant adverse
  impact on economic and equity outcomes.

We sensitivity tested the results for seven different Nationally Determined Contribution (NDC) scenarios.

Our extensive modelling of the government policies provides a comprehensive database for various policy and investment assessments as well as the ESG planning. For further information refer to our latest article here.

As part of global efforts to limit warming to 1.5°C, most countries, including New Zealand, have ambitious climate emission reduction targets. In New Zealand, the Climate Change Response Act (2002) requires all greenhouse gases to reach net zero by 2050. The current report provides detail on the identified transport policy levers to reduce emissions. In a parallel work, Waka Kotahi NZ Transport Agency commissioned Principal Economics to undertake research to assess how and to what extent generalised cost between private vehicles and public transport/active modes needs to change for mode shift to occur in New Zealand’s three largest urban areas.

The four categories of emission reduction policies identified are non-auto travel options, programmes for trip reduction, land use policies that reduce car travel demand, and policies that apply pricing.  Our Emission Reduction Iniatives (ERI) knowledge hub provides a description for each policy, the type of travel it affects, the method for measuring each policy’s travel and emission effects, its secondary impacts and other available information. Other lists and summaries are available at SuM4all (2019), ITF (2022), Transportation for America & Smart Growth America (2020), VTPI (2020), Byars et al. (2017), California Air Resources Board (2014), International Energy Agency (n.d.). Summaries with Australian or New Zealand context discussed include Wallis (2016) and Carran-Fletcher et al. (2020).

The identified policies overlap and interact in various ways. Many have synergistic effects – they are more effective if implemented together. Some compete; for example, ride-hailing may attract travellers who would otherwise use cycles or public transport. As a result, these policies are generally more effective when developed as an integrated programme that includes the optimal combination of strategies that maximises benefits and minimises problems.

Cite this article

Principal Economics. (2023). Emission Reduction Initiatives Knowledge Hub. Report to Waka Kotahi New Zealand Transport Agency.

Aotearoa New Zealand suffers from an infrastructure deficit. Without the key infrastructure needed now for our economy to thrive, we deprive future generations from significant economic prosperity. While transformational infrastructure projects necessitate time to be developed into sound technical solutions to our needs, many New Zealand projects are further delayed by policy decision and financing constraints.
In this novel application of the infrastructure Wider Economic Benefits approach, we quantify the cost to society of these further delays for the first time, by using the example of the Waikato Expressway. We used our subregional CGE model to estimate the downstream benefits of the Expressway. At a high-level, results of our analysis quantify the annual benefits of having the Waikato Expressway in the economy. Without the expressway in function as early as possible, $334 million of economic benefits were forgone each year.

Cite this article

Principal Economics. (2022). Great decisions are timely: Benefits from more efficient
infrastructure investment decision-making. Report to Infrastructure New Zealand.