Geopolitics is changing the way oil markets operate and New Zealand needs to seek out deals in its own right that secure the supply of crude oil in order to address the fundamental threat this crisis poses
Our biggest risk in this crisis is not that oil prices go really high: it’s that price alone ceases to dictate who gets oil.
That’s because New Zealand can afford to pay for access, but it has limited geopolitical power to command access.
This issue is looking increasingly important because the deeper the crisis goes, the more it drives governments to make deals to protect their countries from fuel shortages – as outlined in our analysis for Newsroom in 2024.
This risks fundamentally changing how oil markets operate.
One expert in geopolitical risk and commodity markets believes that threshold has already been crossed.
“Global oil trade is splitting into regional blocs, with flows increasingly dictated by geopolitical power rather than price, signaling a structural shift” says Cyril Widdershoven of Blue Water Strategies. “We are now witnessing … a real-time structural breakdown of the very mechanisms that have governed global energy flows for decades, fundamentally altering market dynamics and stability.”
His conclusion is that “Markets will soon stop clearing through price alone; they will clear through access. It is a fundamentally different system”.
This is Not a Stocks Game – It’s a Flows Game
How markets would work in that “different system” is not clear as it’s largely uncharted territory. In particular, we dont know to what extent price rises will still deal with the gap between reduced supply and historic demand. That is, how much demand will be destroyed by those prices alone.
What we do know from first principles is that the greater the proportion of oil output that becomes tied for delivery to particular countries, the smaller the pool that is genuinely freely traded.
And whenever there is a shortfall in global supply relative to demand, it is the countries depending on that pool who will tend to bear the brunt of any shortages (along with those tied to oil producers whose output has fallen).
Further, any additional cuts in supply resulting from renewed warfare will also tend to come out of that pool.
New Zealand is currently entirely reliant on that pool, as it’s unhedged apart from quite limited stocks.
Increased stock levels, such as the additional nine days of diesel the government has arranged for, are important and address supply volatility in particular. But stocks do not address the fundamental threat posed by the nature of this crisis.
Only hedging arrangements that connect directly with flows of oil from exporters will provide cover against the risk that oil markets will no longer clear on price alone.
The existence of that risk means this is ultimately not a stocks game. It’s a flows game. And making that distinction is critical to how the crisis response needs to be organised.
Why is NZ Unhedged Against this Risk?
There are various reasons why we remain unhedged against this risk.
Firstly, conventional wisdom runs deep in this neck of the woods and gives little rating to the risk of serious shortages because it is looking at this crisis through the lens of the world that was, rather than tracking fundamentals. Through that lens, oil reserves started high, prices have always risen sufficiently to clear markets in past crises, and the impacts that resulted were just a function of more expensive oil rather than shortages.
Another factor is that government does not retain much specialist expertise in oil markets.
Linked to both of the above is sensitivity to fuel importers feeling any threat to their market position from a more proactive government – even if it is acting simply in pursuit of valid security of supply objectives.
And underlying all this is that New Zealand has little leverage when it comes to the negotiations needed to enhance supply security – in terms of goods, services, military weight, or financial strength that could be brought to bear.
That ultimately means we have to work harder and think innovatively, but it first requires recognising the value of arrangements that seek to secure supply chains back to the level of crude exporters.
The Singapore Connection
Analysis of New Zealand’s discussions with Singapore help paint the landscape we find ourselves in.
Singapore is a major refining hub for Asia, exporting 87% of its 1.2 million barrels a day output, and supplies about a third of New Zealand’s fuel.
Both Prime Minster Chris Luxon and Finance Minister Nicola Willis were there two weeks ago to help strengthen ties and give public emphasis to the relationship.
But the key cameo moment came last month when Australian Prime Minister Anthony Albanese also went to Singapore.
He too was on a mission to try to bolster security of supply arrangements when meeting with his Singaporean counterpart, Lawrence Wong. The two countries already have strong energy links, with Australia providing about a third of the LNG that generates Singapore’s electricity, and Singapore supplying about a third of Australia’s fuel.
Against the backdrop of a global squeeze on LNG supplies, Albanese was making it known (without actually saying it) that Australia would be there for Singapore with additional LNG, providing that Singapore favoured Australia with fuel should supplies become tight.
So when the two held a media conference, Wong was asked whether Australia “would get priority treatment if Singapore was forced to cut production”.
“Hypothetical. It won’t happen” Wong replied at the time.
The raw geopolitics was that Australia had leverage and was using it to at very least deliver the message that it expected to see priority given to Australia if fuel was scarce.
What Singapore wanted to avoid saying by implication is that one of the countries not getting as much fuel in that situation could be New Zealand.
Yet with 20% of global LNG production currently off line, and Australia delivering more than a third of Singapore’s LNG supply and having the ability to buffer if from shortages with more, Wong would have little choice but to make sure Australia was satisfied if it came to it, by whatever means was required at the time.
The Trade in Essential Services Agreement
So what then of New Zealand’s deal with Singapore that covers trade in essential services and was inked only last week?
The deal would still be fully observed because, while hyped way beyond its contents, in essence all it does is protect against commercial trade being interfered with. It would not prevent a Singapore-based refining company deciding to allocate all its output to Australia and none to New Zealand, for example.
That does not mean there isn’t a genuine and strong relationship at government level, built on close cooperation and support through Covid supply chain difficulties among other things. Luxon describes it in terms of “We have each other’s backs”, while Wong says the relationship is built on a “very deep reservoir of trust”.
And underlying this is a natural basis for a close trading relationship, given mutual dependencies that each can help secure for the other regarding food and fuel.
It was this natural compatibility that led the Sustainability Council to submit at the time the agreement was being negotiated that the deal should have been framed as a mutual security pact that also imposed positive duties on the countries to look after each other.
Overall, the agreement is still useful to have, particularly should New Zealand acquire some crude and need a reliable refinery to process it.
But as an answer to the risks posed by this crisis, it’s at the lowest rung on the ladder of response options.
And in any case, Singapore is still only an intermediary in the supply chain as it has minimal crude production of its own.
It certainly has more expertise in oil markets than New Zealand. But if the proposition is that New Zealand is somehow outsourcing to Singapore some part of its task to secure supply, then whether Australia will get priority treatment matters considerably.
More fundamentally, it’s not obvious that Singapore has much more leverage than New Zealand when it comes to the kind of deals that matter when seeking to shore up supply security. And though Singapore might have a future food crisis in the back of its mind, how much of its precious influence is Singapore really going to spend on New Zealand’s behalf – especially if it has already had the hard word from Australia and may need to stretch for that to ensure the island state can keep the lights on, literally?
Only if Singapore was in the position where it had arrangements securing crude in its own right, and offered some undertaking about how those upstream flows would be treated to assist New Zealand, could we see a basis for this country being measurably more secure now through the Singapore connection than it was pre-crisis.
The worst case would be that a hyped interpretation of the new agreement and Wong’s reluctance to deal in hypotheticals leaves an aroma of supply security that could well fail to translate into substance when called on, but is cited as reason enough to rest up on questing for the real thing.
Playing a game of musical chairs where we only find out our place on Singapore’s priority list when the music stops would be no way to manage risk.
The Guarantor of Fuel Security
New Zealand ultimately has to use its own resources to secure its future as this is not a minor aspect of economic management or one that can be truly outsourced. The consequences of getting it wrong are too big. Government is the guarantor of fuel security for that reason and this needs to be acknowledged in the discourse.
The responsible minister is instead saying that arrangements with the fuel importers operate on a “high trust model” and is putting a lot of emphasis on the duties they have under their stockholding obligations.
“[In] 2024, the oil companies entered into a set of discussions with us and they pledged that New Zealand would not suffer through their model any major crisis of an absence of fuel. So we are holding them to account. If they do not obey and maintain the law, the fiscal costs on them are enormous” Resources Minister Shane Jones told RNZ.
One problem with relying on this as a protection is that any serious penalties under section 65 of the Fuel Industry (Improving Fuel Resilience) Amendment Act 2023 require that a fuel importer is found to have made a “commercial gain” when not meeting stockholding requirements. If a company was instead found not to have made a commercial gain when failing to be able to source fuel, then the maximum penalty is just $5 million.
And if oil markets increasingly allocate through geopolitical power, fuel importers may no longer be able to deliver the volumes required in future due to circumstances beyond their control.
The more circumstances depart from those aligning with the fuel importers’ stockholding obligations, and their accountability under those obligations, the greater the risk that government will need to fully assume its role as the ultimate guarantor of fuel security.
Willis notes that “what the fuel companies have told us to expect is, even in a worst case scenario, they will still be able to get alternative fuel supply, it just might take a bit longer to get here than usual”. But it’s hard to expect fuel importers to forecast a diminishment of their own capabilities.
A critical gap in our information base is what it would cost New Zealand if fuel supplies were seriously disrupted.
Past studies for government on security of supply have produced scenarios and findings that result in essentially no physical supply disruption, or a 3% cut in the most recent one. So the projected economic impacts come essentially from higher fuel prices – rather than the additional costs that would arise from lack of supply.
Getting any sort of indication of the impacts that a serious shortage could deliver involves going to data from Covid level 4 lockdowns. This was associated with a reduction in diesel use of at least 50% (sources vary up to 70%) and cost the economy $230 million a day – resulting in a 29% drop in GDP while in force.
This is obviously a severe scenario and needs to be treated with care even then as fuel use would be driven by different constraints when rationed. But note also that the $230 million a day figure excludes non-financial social costs and these would be significant – from social anxiety to changed lives after business failures.
The recently released Treasury advice on the potential impact of the crisis is not comparable as its most impacting scenario apparently considers only price effects (oil at $180 a barrel), not the impact of any shortage.
The “Crunch”
Conventional wisdom has now at least moved on to recognising that even if the strait of Hormuz reopened tomorrow, there will inevitably be what some such as Wong have termed a supply “crunch”.
That’s when the reduced production of oil eventually results in a fuller adjustment at the demand end.
There is a lot of work going on in trading houses and governments to try to better understand when that will be and what will result, but it’s ultimately not forecastable.
What we can observe is that the closure of the strait of Hormuz has today cut global production by 13 billion barrels a day or around 13% the IEA states, while demand destruction is about 1.6 million barrels a day according to ING commodity analysts.
As there is not a great deal of additional production coming on in the short term (beyond that is another story), today’s flows are therefore mostly being underpinned by the release of stocks accumulated pre-crisis.
These points are enough to tell us that the current price for oil is considerably below the level needed to alone rebalance the shortfall in global production. More demand would need to be destroyed by higher prices to reach a new equilibrium.
When economist Paul Krugman ran the numbers, it indicated that mathematically oil would be headed for around $200 a barrel if price alone were to be the factor bridging to that new equilibrium.
And when looking at the timing of the crunch, this is not the mathematics of when stocks will run out. It’s about when key players, certain governments in particular, will judge that they have reached a point where they have to change approach and be more cautious in their release of stocks in order to still buffer the transition later on.
That’s when the question about whether price alone will continue to determine allocation comes to bite, and then whether new rules come into play quickly or there is a messy transition.
This is all before taking account of the potential for additional supply shocks. If for example Iran mined the Red Sea and took out another 7 million barrels a day, market reactions could be swift and leave New Zealand considerably more exposed.
And it’s not even just the Iranian conflict that poses this risk. Ukraine’s progressive destruction of Russia’s infrastructure for crude oil exports could turn out to be significant, as new long range drones that are slowly reducing shipments ultimately threaten up to 4 million barrels a day of global supply.
The Worst Case Scenario
In the early days of the crisis the prime minister stated that the government was “preparing for the worst case scenario”.
When at the end of April it announced an additional nine days of diesel storage, Luxon said it had been procured “so that New Zealand is well prepared for the possibility of a prolonged global shortage”.
Just how such a prolonged global shortage could impact New Zealand, how far its current and newly planned stocks would protect against that, and what other measures are economic to implement in addition are key questions for our collective future.
Critical to answering those questions is factoring in the potential for oil markets to soon operate quite differently.
Japan is one of the countries not waiting to find out more before acting to address that risk. While it held over eight months’ worth of stocks at the start of the crisis, compared to three months for New Zealand if all went well, Japan has been working hard to reduce its reliance on Middle East crude that accounted for 94% of supplies pre-crisis.
Japan’s industry ministry now says it expects to secure about 60 percent of crude oil for May from alternate sources to that relied on pre-crisis..
With tankers arriving last week from Azerbaijani and Russia, Japan has been out in earnest cutting deals for crude – including through direct negotiation by its Prime Minister Sanae Takaichi, such as that concluded with Mexico’s President Claudia Sheinbaum..
Such deals are what New Zealand is ultimately in competition with, yet to date government effort has been heavily focused on countries with export refineries that depend on crude imports, rather than securing crude in its own right and arranging for Singapore to process it, for example.
The types of deals Japan has been securing are the strongest indicator that we are in the twilight of business as some sort of usual in the oil markets.
Responding effectively will mean thinking outside the box and unconventionally at times. It will also mean being bold and flexible enough to adopt new ways of solving things that bigger countries can lack the institutional adaptability to pick up.
Above all, it means being willing to acknowledge the full scope of risks this crisis throws up and covering them before the options are gone.
This article was written by Simon Terry and first appeared in Newsroom on 17 May 2026
https://newsroom.co.nz/2026/05/15/whats-worse-than-high-fuel-prices-fuel-supplies-allocated-by-favouritism/
