A leading economist warns Kiwis could face more pain at the pump with the Israel-Hamas conflict causing oil prices to soar.
If things weren't already bad enough for Kiwis who are experiencing a cost-of-living crisis and higher petrol costs after the Government's 25-cent fuel tax subsidy ended earlier this year, an independent economist warns those petrol prices could be about to get even higher.
The average price of 91 octane in New Zealand is currently $2.95 but that could be about to change.
Oil prices rose by around $4 a barrel, or about 5 percent overnight, amid fears the conflict could disrupt output from the Middle East.
Israel and Palestinian territories are not oil producers but the Middle Eastern region accounts for almost a third of global supply.
Experts are predicting if Iran's involvement in the conflict grows, a large stake of the world's global oil supply is at risk.
Bagrie told AM on Tuesday this will only worsen inflation and cause Kiwis more pain at the pump.
"If you go back and have a look at history in regard to what's called the term premium or the risk premium that can come into oil prices when you start to see some sort of more broad-based global conflict, oil prices can be up anything from 40 percent to in excess of 100 percent over what they were trading at pre-conflict," Bagire said.
"There is the real potential here for this to escalate and of course what we've got at the moment globally is a real inflation problem and the last thing any consumer, any household, any central bank wants to see at the moment is a lot more fire being put on the inflation story and of course, oil prices are a pretty big chunk of everyday living in regard to what we do spend on petrol prices."
But before the conflict flared over the weekend, Bagrie said signs were actually positive with oil prices coming down.
"Last week we saw global markets throw the toys a little bit out of the cot. We saw your US ten-year bond, which is a global benchmark for the international cost of capital, started to price in what's called the higher for longer interest rate narrative, which is just another way of saying global bond markets were taking the view we need to hit the global economy in order to get inflation down," he said.
"What we saw over the space of about ten days was that oil prices went from about $92-$93 a barrel, down to $82-$83 as those expectations that the world economy was going to be weaker in this battle to get rid of inflation."
But that has all changed now the conflict has begun, with oil prices soaring.
"What we've seen now in the past 24-48 hours is that markets have basically recoiled from a lot of that drop we've seen over the past ten days. In fact, it recoiled about 50 percent of what we've seen over the preceding week and a half," Bagrie explained.
Bagrie warns it's not just the Middle East people should be watching, it's also China, Taiwan and the United States.
"We live in a world now where what's called the rules-based system that we've been used to for a long time has now been challenged by the exertion of power. When power tends to interfere with rules, you tend to see a lot more of a risk premium," he said.
"We need to put a lot more of a risk management hat on key inputs and of course fuel and petrol, diesel in particular is a pretty big input into the whole production process across New Zealand.
"So politicians put your risk management hats on and start to think about these geostrategic considerations and it's not just about what's going on in the Middle East, let's think about what's going on in Asia as well, or what could go on in Asia."
Wacth the full interview with Cameron Bagrie in the video above.
