The Iran war could not have come at a worse time for the Government.
In the short term, it will raise fuel prices and reduce tourist numbers.
But more comprehensively, it is likely to increase inflation and therefore threaten the Reserve Bank, raising interest rates before the election.
Add to that polling numbers for National which refuse to move upwards, and then the Prime Minister’s waffly reactions to the United States- Israel attacks on Iran, and there must start to be concern at the top of National as to whether things could get worse.
They might not.
The war could end quickly, and newfound peace could descend on the Middle East.
But they might get much worse.
The main risk is the economy, and the first flash point here will be oil prices.
Finance Minister Nicola Willis told Parliament yesterday that the price of crude oil had risen this week, “but to nothing like the levels seen when Russia invaded Ukraine.’
“When US markets closed at 10 am today, it was up 7% on last Friday’s close at just under US $78 a barrel. That compares with the price of US$128 a barrel on 8 March 2022,” she said.
There are two forces pushing prices: the ability of tankers to transit the Traits of Hormuz and Iranian strikes on other Gulf countries’ oil facilities, such as their successful attack on Saudi Arabia’s Ras Tanura refinery.
But in late trading yesterday, US oil prices continued to climb, with one Bank, JPMorgan, warning that if the conflict continues for much longer, prices for Brent crude could rise to Ukraine war levels of $US120 a barrel.
Prices at that level in 2022 saw the Reserve Bank in June dramatically increase its Official Cash Rate forecasts by nearly 50 per cent from 1.9 per cent to 2.7 per cent for the September quarter and from 2.2 per cent to 3.4 per cent for the December quarter.
The Bank’s current forecasts for the remainder of the year are 2.3 per cent for the June and September quarters and 2.4 per cent for the December quarter.
However, Westpac chief economist Kelly Eckhold suggested last night that though inflation might rise, the Bank might be able to hold OCR rates.
He said he and his Australian colleagues had looked at some scenarios that were more serious than we have seen so far.
“We look at the case where the oil market is merely disrupted, and the oil price rises another 25% to $100 a barrel. And then we consider the Armageddon scenario of Hormuz closure for 1-3 months,” he said.
“The results show a significant rise in inflation and reduced GDP growth for both Australia and NZ.
“The impacts on NZ are larger as we are less insulated from the energy price shock.
“Inflation in NZ would move well over 3% in the worst scenarios.”
But even so, interest rates might not rise.
“For monetary policy, don’t jump to the conclusion that New Zealand interest rates will rise.
“This might happen, but as long as the economy is operating well below capacity and inflation expectations don’t get unmoored, then the OCR would likely stay where it is at stimulatory levels.“
But the situation could ease if the conflict ends within the four or five weeks that President Donald Trump is promising.
There would seem to be no case for any immediate retail increases.
“Recently introduced regulations require fuel importers to maintain at least 28 days of petrol and 21 days of diesel reserves, with the Government having acted to increase that requirement,” Willis told Parliament.
“The petrol companies have all reported healthy stocks, and additional supplies are already in transit, so domestic fuel shortages are not anticipated in the short or medium term.
“The impact on price will depend on how long the conflict continues and whether it escalates.”
The other energy market indicator that will worry the Government is the fact that LNG gas prices rose by 50 per cent yesterday after Iran struck two LNG facilities in Doha, Qatar.
The country produces 20 per cent of the world’s LNG supply.
Promoting the proposal to commission an LNG import facility to replace New Zealand’s dwindling indigenous supplies of gas, Energy Minister Simon Watts has discounted concerns about volatile gas prices, saying the world would soon be in surplus.
But any increase on the scale seen this week would make a nonsense of the Government’s promise that importing gas would see electricity prices fall.
All this will be making National MPs nervous.
Yesterday’s Roy Morgan poll will not have helped.
That shows National down 7.1 per cent since the election on 31 per cent and Labour up three per cent.
A National-led coalition would have just 61 seats, barely a majority.
More polling results are expected next week, and if they show National falling further than what it is currently doing (such as if its support were to go below 30 per cent), anxiety among some backbenchers might well turn to full-blown panic.
Once again, the focus will turn on the Prime Minister, who has hardly helped things this week with his confused accounts of where New Zealand stands on the United States-Israeli actions.
Initially, he was careful to neither endorse nor condemn the American-Israeli actions, a stance that was compatible with the response from the European Union and key European nations, France, Germany and Britain.
But then on Monday at his post-Cabinet press conference, he appeared to change his position to one of support.
“New Zealand has long supported actions that are preventing Iran from getting a nuclear weapon,” he said.
That must have caused concern within the Beehive because yesterday morning, he said he had “misspoke” with that statement.
Questioned in Parliament by Opposition Leader Chris Hipkins about his Monday statement, he simply said, “I clarified those remarks this morning.”
The whole incident suggested that the Prime Minister was not totally on top of things, which ordinarily might not matter, but on issues of peace and war, as his Foreign Minister Winston Peters likes to say, “words matter.”
The truth is that the Government doesn’t and can’t know how the war will play out, and therefore what the impact on the economy will be.
But in that fog of uncertainty, it will be all the more important that the Prime Minister provides clear leadership.
We shall see, and possibly ominously for him, his caucus will be watching very closely.
