New Zealand economist warns the full pain of the oil shock hasn't arrived yet
Chelsea Daniels interviews economist Bernard Hickey on The Front Page podcast about the escalating fuel crisis and its impact on New Zealand.
Summary
Chelsea Daniels interviews Bernard Hickey, journalist and publisher of The Kaka, about the deepening fuel crisis facing New Zealand businesses and consumers. Hickey argues that the worst is yet to come, with the Strait of Hormuz closure potentially lasting until August or September, and that a prolonged closure represents a guaranteed global recession. He warns that Treasury's worst-case scenario of $180 per barrel may itself be too optimistic, as it fails to account for systemic effects on the global economy — including shortages of helium, aluminium, and fertiliser flowing through the same disrupted supply chains. Hickey also challenges the widespread use of "fuel surcharges" as a pricing mechanism, arguing they create a false impression of temporariness while eroding consumer trust and spending power.
Key Takeaways
FULL TRANSCRIPT
Introduction
Chelsea Daniels: New Zealand businesses are running on fumes, with cash reserves dwindling amidst surging fuel prices and KiwiSaver costs, all while the full shockwave hasn't fully hit yet. Prosper polling shows 17% of SMEs have less than a month of cash left, while RetailNZ warns retailers are bracing for a significant downturn as diesel prices jumped 150% in March. Second-round effects are now emerging as well, from Inter-Islander doubling surcharges to Maersk's 27% hit on New Zealand routes as global oil stocks draw down.
Today on The Front Page, journalist and publisher of The Kaka, Bernard Hickey, joins us to explain why the fuel crisis reality is only just dawning, the supply chain pain ahead, and what it means for New Zealand's economy.
Why businesses haven't yet felt the full fuel shock
Chelsea Daniels: Bernard, financial technology firm Prosper has done this latest poll showing 17% of SMEs with less than a month's cash reserves, and fuel now the top cost for many of them — yet they're absorbing it rather than passing it on yet. Why do you think businesses haven't felt the full fuel shock yet?
Bernard Hickey: I think a lot of people were hopeful that this would be a short-term thing, a bit like the Russian invasion of Ukraine in 2022, where prices shot up for about a month, maybe two months, and then they started to come down. Well, we're into the third month now, and all of the noise we're hearing from the Strait of Hormuz is that Donald Trump is in for the long term. The Iranians are definitely in for the long term. This thing could be closed until August or September. And if that's the case, that will create more damage in the stream of oil and products downstream and also upstream, because every time you have to turn off one of these wells, you actually destroy future production.
That means that the price of diesel — which for a lot of the economy is the fuel that we use — is going to be stuck in and around the $3.50 a litre mark for the rest of the year. That's a major shock for anyone who requires diesel to transport stuff around, to drive to work, to do anything really. That's used in the retail economy and it's going to flow through into all sorts of prices. So you get a double whammy. Not only do you have to pay more to fill up your tank, but then when you buy something from someone else, they've added a surcharge on as well. So it'll flow through.
Retailer survival and consumer confidence
Chelsea Daniels: RetailNZ actually says 66% of retailers won't hit sales targets this quarter, which probably comes as no surprise — that's with diesel up 150%. But 29% say survival is just a coin toss at the moment. Is this pessimism justified?
Bernard Hickey: It is, if we see fuel prices stay this high for the rest of the year. Because not only do you have the costs for your own business, but whatever you're selling to consumers is struggling because consumers are also feeling very worried. If you look at the ANZ Roy Morgan Consumer Confidence Survey from last week, it showed consumers less confident than they've been since COVID. And actually, they see more inflation than what we saw during COVID — over 6% inflation — and that is at the same time as consumers are expecting wage growth of around 2% to 3%. So right there, you see a real wage shock. People are expecting that after the effects of inflation on their wages, they're going to be worse off.
And the most obvious place they're going to be worse off — the one thing that they really can't do without — is fuel. It takes a while to sell your gas guzzler and get something cheaper, or make a decision to change your workplace so that you can walk there or take the bus. No one's really changing the availability of public transport. You're stuck. So for a lot of people, the moment they see that price change on that tower outside the service station, the mental mathematics go: I'm stuffed. That is net $223 less that I have to spend on everything else.
So if you're a retailer or in the retail economy and you're selling things to consumers, to households, you've got a double whammy. You've got a cost shock and you've got an income shock. So you can see why so many people are worried about it.
And remember, we've come to this position after two or three years of very weak, stagnant economic activity with falling employment, relatively high inflation, and not much demand. It's been a hardscrabble experience for a lot of people.
And this is the difference. Unlike in previous downturns, when if you're a small business person and you had a bad year and you needed to top up because you'd made a loss, typically you'd just go straight to your bank and get some money out of the equity in your home — because most small business people have their own home and have used it as a buffer for the bad times. But for the last two to three years, house prices have been falling or down from their peaks. And so businesses have not been able to go to their banks and pull money out of their houses. At the same time, you've got the IRD really pushing hard to get people to pay back their tax debts, some of which are from the COVID era. So for a lot of small businesses, you have a triple whammy: a cost whammy, an income whammy, and then an IRD whammy coming after you as well. And that's why we have liquidations at an 11-year high.
Fuel surcharges and the psychology of pricing
Chelsea Daniels: I've seen this fuel surcharge term being thrown around. Inter-Islander has obviously doubled its fuel surcharge for trucks, and Maersk has slapped a 27% surcharge on New Zealand routes — meanwhile, Australia's been slapped with an 18%, but that's probably a conversation for another day. How fast will these costs be fed through to the consumer?
Bernard Hickey: In some places, immediately. Already. Within three or four weeks, the freight companies are starting to add on surcharges in various places. It becomes quite unusual when people who have really no obvious way to slap a surcharge on start doing it. A cup of coffee — well, here's a fuel surcharge on top of that.
Chelsea Daniels: Speaking of, I actually bought my mum something for Mother's Day this Sunday. For flowers to get from Adelaide CBD to maybe ten minutes out to my parents' house, there was a fuel surcharge. Is that something that's just appeared because of this fuel shock, or has it kind of always been there but I've never really noticed it before?
Bernard Hickey: I think there's some really interesting behavioural finance going on here — it's a bit like the psychology of pricing. How do you put your price up but do it in a way so that you don't get the blame? And that is to say, "Oh, nothing to do with me, it's just a surcharge that I'm passing on from the freight company." And the implication when you put on one of these surcharges is that it's temporary, because in the past it seemed like they were temporary.
The problem, of course, becomes: what if this fuel price shock is a multi-year, multi-decade shock, like the one we saw in the 70s and 80s? Now, eventually oil prices did fall, but that was back when we could easily turn the tap on. And this problem in the Middle East, where 20 to 30% of our oil and gas comes from, is potentially something that could last longer than a month or two.
1973 was the last comparable example of this, when the Arab oil exporters put an embargo on to try to pressure the United States and Israel. And it took four months for that to be negotiated away. This time around, there's been open conflict between the United States and Israel and Iran. Back in 1973, there had been attacks on Israel, but the United States hadn't bombed anyone. This time around, they have, and have made it an aim to change the regime in Iran at the same time as casually killing the top leadership. So not surprisingly, Iran is now in a very precarious position — or they believe they are — where they have to fight for their lives.
It's amazing what people do when they're pushed into a corner. And they are now learning a very brutal lesson, which is that if you don't have nuclear weapons, someone's going to try and kill you. If you do, you can lead a quiet life. Just look at North Korea — no one's been bombing Pyongyang lately. That's because they've got nuclear weapons. So the United States has really stumbled into a massive problem, which is they really don't have the power to force Iran to do what they want. Iran now knows that it has to get nuclear weapons or it's dead. And the Americans now know that too. So we've really got a big problem here.
And that's why it's worth challenging the surcharge thing, because surcharges are supposed to be temporary. They are a decision by you as the firm to add this cost into my price and effectively pass it on to me. There's lots of push and pull when it comes to pricing and profit margins. Who should pay? Should it be the consumer? The company? The government? At the moment, the surcharge language is being used to layer on a cost directly to the consumer, with the expectation that the firm who's doing it won't get blamed and that, in theory, it'll go away soon.
So that will be the interesting thing — we need to go back to people in two or three months and say, "Hey, is this gone away yet?" And if they say, "Well, there's still war in the Middle East," okay. But at some point, the surcharge thing becomes a bit of a wheeze and we'll have to revisit it. Because a bit like the credit and debit card pay-wave problem, it's sneaky. It just really gnaws away at people's spending power. And it really affects confidence and trust in prices.
One of the reasons we've got such a problem now in our politics and our economy is that people have had the most almighty bill shock. Their mental map of the price of something has just been shredded in a way that, for a lot of people alive today, has never happened to them. Yes, there are people in their 60s and 70s who remember the inflation of the 1970s and 80s. And if you've migrated here from Zimbabwe, this is not a big surprise. But for a lot of people, this has really thrown them — this idea that the prices of things are something you can rely on, that they're going to be there the next day and the day after that. That's gone. And so when you get these little add-ons and nips and tucks and little scratchy bits of paper stuck on machines saying there's a surcharge, you get very grumpy.
Chelsea Daniels: And the surcharge didn't appear until I had chosen the bouquet, gone through to the payment page, and then it was part of the shipping costs. So it's then associated with — it mustn't be them, it must be the people collecting it from them and taking it to my mother's house. It's a very roundabout kind of thing. And the same with the shops, right, with the scratchy little bits of paper — it's kind of, "Well, it's the banks doing this to us, not us doing it to you."
Bernard Hickey: There is some really interesting psychology and work around injecting costs into prices in a way that muddies the waters for consumers, or makes people unaware of that extra cost until the last minute — like you say, once you're into the checkout area, particularly if it's online. It's what I call sludge economics. You've heard of nudge economics, where you do something at the last minute or in a way that nudges you along in a certain direction. And sometimes that's good — if you want to nudge people into savings, for example, that's what KiwiSaver is all about. But you can also do it the other way around. You can make it very difficult to unsubscribe from something, or change your decision at the last minute when a nasty little charge gets plugged in. That's sludge economics.
And we are seeing more and more of this, partly because when we're buying online, we're very attuned to getting in and out fast. We love the idea of a frictionless experience. Our brains are attuned to: just move on, get to the next tab in your 73 tabs that you've got open. Your brain is telling you, move on, pay the bill, get to the next thing because there's a lot on your plate. And a lot of companies now are taking advantage of that, particularly online.
Worst-case scenarios and the Wile E. Coyote moment
Chelsea Daniels: Give it to me straight. What is the worst-case scenario that you are predicting here?
Bernard Hickey: I'm predicting that this is going to get worse before it gets better. This is going to be a longer and costlier conflict than just about everybody expected.
Chelsea Daniels: You have said that a prolonged closure of the Strait of Hormuz is a guaranteed global recession. Do you still stand by that?
Bernard Hickey: Yes. The world economy cannot grow without 20% of its energy supply, period.
Chelsea Daniels: I saw that you described the oil markets as being in a Wile E. Coyote moment. Explain that to me.
Bernard Hickey: So for those people who know the story of Wile E. Coyote, he's a very brash, arrogant coyote who's always doing things very fast and has always got lots of sneaky tricks. He's out there to get the Road Runner, and he's forever going very fast and then running off the edge of the cliff. And of course, the joke is that he looks around at the Road Runner, the Road Runner goes beep-beep, and then he plummets to his death on the canyon floor. So that moment when you're suspended in midair, your arms and legs are moving and you haven't quite dropped yet — that's where we are with the global oil market.
Oil supplies have managed to keep up with demand so far, but not because we've been pumping oil. We've been drawing down inventories — stocks in the United States in particular, but also in Japan and South Korea. So all these ships that are still coming to New Zealand with refined fuel, coming from refineries in South Korea and Japan and Singapore, they're using up stocks now that at some point are going to run to dangerously low levels. And then the prices of crude — not just in the paper markets, but also in the futures markets — are going to catch up.
So just as Wile E. Coyote slams into the bottom of the canyon and there's a big hole in the ground, that's the risk here for the oil markets. We've been seeing prices up around the $100 to $110 a barrel mark. But when you look at the size of the supply reduction coming out of the Middle East, we're talking more than 10 million barrels a day — upwards of 10% of world demand. The supply balance is very tightly managed, so whenever you've got a little bit more demand or a little bit less supply, that creates a big change in price. It's very volatile, very elastic.
What it means is that when eventually the oil markets work out — like Wile E. Coyote — that there's nothing underneath their feet and they've run out of supplies, then prices go up, because you need a higher oil price to destroy as much demand as supply has been destroyed. And that means oil prices need to be, according to those who've done the demand destruction calculations, upwards of $140 to $150 a barrel — or, wait for it, in a range that goes up to $350 US a barrel. If we get to that sort of level, we're talking about serious pain in the global economy. In New Zealand, that's $5 to $6 a litre. And that's a real problem.
Chelsea Daniels: Well, if not more, right? Because Treasury did a couple of predictions — an average scenario and a worst-case scenario. Wasn't the worst-case scenario something like $180 US a barrel, with the war going on for years instead of months? So they haven't even contemplated the idea of it being $350 a barrel.
Bernard Hickey: No, exactly. And I think it's worth challenging the outcome of that worst-case scenario that they have, which was that somehow our economy will continue to grow. In my view, it is too trusting and benign in its view about the rest of the world and how the rest of the world would cope.
Remember that not only have we lost a bunch of oil and gas from the Middle East, we've lost a bunch of helium, we've lost a bunch of aluminium, and an awful lot of fertiliser. So all of these raw materials are pushing up prices for more than just fuel. We're talking food, metals, plastic, and things like helium, for example. Nearly half of the world's helium comes through that strait — or is now not coming through that strait. That's used for a bunch of high-tech applications, particularly chip-making. And you don't make anything without a chip now. Your toaster has got 150 chips in it. So once that starts to flow through to the manufacturing sector, there are going to be some real issues for the global economy.
That's why a month or two, people could reasonably expect that we could ride through this without too much of a bump. Treasury, yes, seems to have a forecast of $180 for a year or two, but you do wonder if it truly takes into account the systemic effect of that sort of shock to the global economy.
New Zealand's fuel deal with Singapore
Chelsea Daniels: But we've just signed a partnership with Singapore, haven't we? So we're all okay on the fuel front — should we not be?
Bernard Hickey: It's great that we've done this deal, and it's interesting that other people now want to do very similar deals. But the first rule of power is: whoever can pay the most will get it. And there's going to be an awful lot of trouble for everyone if we're still six to twelve months down the track and none of that oil has come out of the Middle East. Because yes, Singapore, South Korea, and Japan can use up some of their stocks. They can get oil from other places — Africa, America, Latin America. But the scale of the losses in the Middle East and the ability to pump extra oil in other places is nowhere near close enough. You've lost 10 to 15 million barrels a day out of the Middle East. You can maybe get one or two or three million barrels a day from the rest of the world.
But also, a lot of that oil from the rest of the world — stuff from Africa, stuff from America, particularly the Gulf Coast — a lot of that you can't get through the Panama Canal. And if you've got problems getting through the Suez Canal, because if there is a further escalation of the war in the Persian Gulf and the Houthis come in and block the Red Sea as well, then you're having to move that oil a lot further than you were from the Middle East. That means the same amount of oil needs double or treble the number of tankers and double or treble the amount of time. You insert that into a supply chain and you've got a major problem.
So I hope that our bags of milk powder are so beautifully valuable that the Singaporeans will give up their fuel for us. But there'll be a whole bunch of other customers who are just as good customers as us who'll be wanting it. And there's always in this sort of world a force majeure — this is the clause at the bottom of the contract that says, "Well, if there's a war and I can't get the oil, I'm sorry, I can't provide the fuel."
And push comes to shove: if your domestic economy can't get what it needs and you have a choice between selling it to someone because there's a bit of paper that says you will — and being kicked out by your own voters because you've chosen a foreign organisation or country over your own people — yeah, that's not going to work. It's nice to have, and sometimes at the margins it'll help. But if we're still looking at a closed Strait of Hormuz in a year's time, all bets are off.