Economic risks from diesel supply and price shock become more worrying

New Zealand is facing a growing economic risk as tightening diesel supply intersects with sharply rising fuel prices, creating a dual shock that is beginning to ripple across industries. Recent data shows a clear drawdown in domestic fuel stocks, particularly diesel, with replenishment shipments struggling to keep pace with demand. Although fuel on-water provides some buffer, forward-looking estimates suggest a material squeeze emerging in early April, raising concerns not just about higher costs, but also about the adequacy and transparency of available supply. As uncertainty builds, attention is turning to both the resilience of supply chains and the potential need for an escalation in the government’s fuel response framework.

We have been tracking MBIE’s fuel stocks data since March 1, and in-country fuel stocks have clearly been declining recently. More fuel is being used, or at least purchased, but shipments aren’t quite keeping up with demand. By 22 March, the latest data available, in-country fuel stocks for diesel had fallen to 18.1 days of cover, down 28% from 1 March. Petrol had fallen 9.3%, to 24.5 days of cover. Jet fuel had also pulled back, down 28% to 20.1 days of cover.

Stock on-water (and so on its way to New Zealand) makes the picture look better, but still tough. There was 28.3 days’ worth of diesel on-water and heading to New Zealand on 22 March, down 2.4% from 1 March, but there was a 6.4% increase in jet fuel on water (totalling 23.4 days) and a 10% boost in petrol on water (24.2 days).

Our initial analysis on Wednesday afternoon, following the publishing of these figures, was that New Zealand could be down to just 11.3 days of diesel by 5 April. Thankfully, those fears were unfounded, and our analysis and questioning led to a broader supply of information from government.

For some bizarre reason, MBIE previously did not count fuel that was either discharging fuel at a New Zealand port or moving around coastal waters as “in-country”, nor as a shipment “on-water” within the next two weeks. Media reporting of our analysis from Wednesday has now prompted MBIE to update their reporting to show an effective “Week Zero”, with currently discharging fuel.

This update changes the assessment materially. As of midnight Sunday 22 March, New Zealand had 18.1 days of diesel in-country, a further 11.6 days currently discharging or moving between NZ ports (the figure that wasn’t published before), then shipments of 4.2 days by 29 March, another 7.2 days by 5 April, and a further 5.4 days by 12 April.

The wider concern here remains that New Zealand is continuing to draw down our current fuel levels, with not as much fuel apparently available to replenish supplies. Although we’re pleased that our analysis prompted better information to be published by the government, we remain frustrated that, like during the COVID-19 pandemic, government-supplied information took too long to become available, was hard to use, and the ramifications were large. We are now having more regular conversations with MBIE around fuel stocks, to better understand changes in trend heading forward.

We anticipate that the government could raise New Zealand’s fuel response to Phase 2: Moderate, as part of the four-phase National Fuel Plan. At Phase 2, the National Fuel Plan includes the following measures.

• Moderate fuel distribution impacts, most customers still serviced but causing risk of shortages to critical fuel customers.
• Fuel SCE activated to monitor demand levels and resupply options and coordinate Government support as required for the fuel sector.
• Critical Fuel Customer prioritisation is invoked. Fuel companies to take steps to ensure critical customers are supplied. Government powers may be used to enforce this.
• Civil defence Emergency Coordination Centres maintain list of critical customers and communicate changes to national LUC and local service stations.
• State of emergency may be in place.

Alongside possible supply constraints, higher diesel prices are pushing up transport costs across the board, with fuel adjustment factors being implemented quickly as everyone struggles to keep on top of current fuel price increases. Infometrics analysis suggests that, unsurprisingly, transport is most exposed to higher fuel prices – and risks to supply. We estimate that 19-26% of non-wage operating costs for transport operations, across road, rail, sea, and air, are oil-based fuel costs. Already, Air New Zealand and Jetstar have cut a number of flights across the domestic and international networks, consolidating their activity due to the spike in fuel prices.

The fishing and aquaculture industry is the most exposed, at 26% of non-wage operating costs, given the importance of diesel to power fishing vessels.

Other sectors are also exposed. Nearly 11% of primary sector support services and 5.5% of horticulture non-wage operating costs are for oil-based fuels, with diesel used across farm machinery. Mining equipment, heavy and civil construction, and non-metallic mineral manufacturing (concrete and aggregates) also have high exposure.

The primary sector is facing a potential double-hit, with fertiliser prices globally surging after the conflict began in the Middle East, given the region supplies various inputs into the fertiliser sector. Some parts of the primary sector enter this period of uncertainty with more of a buffer, with higher commodity prices across dairy and meats. But horticulture and arable farming operators don’t have as much of a buffer, and they are facing higher costs immediately. The 25% spike in on-farm costs during 2021-23, as fertiliser, fuel, and finance costs rose sharply, will still be fresh in the minds of farmers.

We expect cost pass-through is most evident in wholesale and retail trade. Higher freight costs, alongside rising supplier prices, are pushing up the cost of producing the goods themselves and getting goods onto shelves.

Various manufacturing sub-industries are also relatively exposed to higher oil-based fuels and transport costs, adding pressure on top of existing concerns. Direct energy and transport costs are rising, but so too are imported input prices as global supply chains adjust. Higher plastics prices will also make packaging costs rise.

Construction remains particularly vulnerable. The sector is already grappling with subdued demand for some sub-industries, and tight project economics for others, especially civil works. Higher fuel costs add another layer, lifting the price of transporting materials and contributing to increases in energy-intensive inputs such as cement and steel. Concerns not only around pricing pressures, but actual securing of supply of diesel, are high. Any fuel disruptions, no matter how temporary, could undermine momentum in civil construction activity, adding cost and time delays to already large, expensive, and long-term projects.

We have also started to hear about higher prices for plastic-based packaging and plastic pipe prices.

Earlier this week Reserve Bank Governor Dr Anna Breman gave a speech outlining some of the Bank’s thinking on the current oil shock, and laid out the Reserve Bank’s approach to the shock, ahead of the next Monetary Policy Review in early April. Essentially, the Reserve Bank is sticking to the usual supply shock playbook, where the Bank will tend to “look through” temporary price spikes where they are “unlikely to have an impact on medium term inflation.” In other words, just because we expect headline inflation to head to over 4%pa in the near-term, doesn’t necessarily mean the official cash rate will need to rise. Higher fuel prices aren’t expected to continue to happen every single day for the next five years, and more money going to pay for more expensive fuel should dampen spending, and then pricing pressures, in other parts of the economy.

The Bank would look to tighten monetary policy if those short-term pricing pressures start to broaden, such as if businesses started to raise prices across the board in response to concerns that further oil price shocks might appear and those businesses needed to build up a stronger buffer.

The Bank’s view hasn’t stopped wholesale and retail interest rates increasing in the last couple of weeks. Swap rates have increased over 70 basis points (0.70%) between 2 March and 23 March, which has increased borrowing costs for banks, leading to retail mortgage rate increases. Although we’re still not expecting an official cash rate increase any time soon, higher bond and swap rates are set to pushing lending costs up regardless.

The combination of constrained diesel availability and elevated fuel prices represents a significant headwind for the New Zealand economy, with the most acute effects set to be for transport, the primary sector, and construction. These pressures will flow through supply chains, lifting costs for businesses and consumers alike, while also testing the operational resilience of fuel-dependent industries. Although the Reserve Bank is likely to look through the immediate inflationary spike, rising funding costs and widespread cost pass-through signal broader economic tightening already underway.