Strait of Hormuz
What a closure of the Strait of Hormuz could mean for NZ
Strikes on Iran over the weekend and the retaliatory strikes that followed highlight how interconnected the world is and how events in a narrow body of water on the other side of the world can reverberate across the globe.
We like to think that New Zealand is insulated from Middle Eastern turmoil. We don’t import oil directly from Iran or Saudi Arabia. Our petrol, diesel and jet fuel arrives in tankers from Singapore, South Korea and Malaysia. We are geographically distant, politically neutral, and comfortably at the bottom of the Pacific.
But in energy systems, flows matter and geography is deceptive.
New Zealand sits at the extreme margin of a highly interconnected global supply chain and as such is very vulnerable.
Strait Closed?
The Strait of Hormuz facilitates the flow of approx. 20 million barrels of oil per day, around 20% of the global petroleum liquids trade. It also facilitates around 20% of the LNG trade.
As I write this morning The Strait of Hormuz appears to be closed. I am not sure if it is primarily due to a military blockade, ongoing strikes, or the risk of transit is simply too high for ship owners and their insurers. Either way the flows of energy through this choke point have dried up for now.
Brent crude prices jumped from $73 to $81 on Sunday as news of the strikes hit trading desks around the world. The price has softened slightly to $78 this morning.
The first-order effect is price. The second-order effect will be physical scarcity. New Zealand is highly exposed to both.
The key question is how long will this conflict last?
We don’t import Middle Eastern crude but we import fuels from countries that do.
Since the closure of Marsden Point refinery in 2022, New Zealand imports 100% of its refined fuels. More on this in New Zealand Energy Stock-take Part 3 - Refined Fuels.
Our primary supply sources are Singapore, South Korea and Malaysia.
Those refining hubs rely heavily on Middle Eastern crude streams. If the Gulf crude is removed from the system, even for a short period Asian refineries immediately face feedstock constraints.
One of the key reasons these refineries source from the Middle East is they are configured and optimised for medium sour Gulf crudes. This specification of oil is required to get a crack spread (the range of hydrocarbon fractions available) to provide optimal yields of the middle distillates, specifically diesel and jet fuel.
If the Straits of Hormuz remain closed or restricted for more than a few days, expect refinery margins (crack spreads) to spike, middle distillates (diesel, jet fuel) supply to tighten first, and regional buyers to compete aggressively for non-Gulf crude and finished products.
Diesel in particular is critical to every economy around the world, particularly New Zealand.
New Zealand is not a price setter in that contest. We are a price taker at the bottom of the South Pacific.
Storage.
Again time is key and the question of how long this will last is critical.
New Zealand typically holds around 12–18 days of commercial fuel stock in-country, depending on product and season. Industry figures often cite around 14 days of cover as a working average.
This storage is not centrally controlled and it is not a strategic reserve as such. It is distributed across the country and even establishing how much is actually available would be difficult I suspect. Some of it will already be contractually committed which further complicates things.
If there is a sense that this conflict will persist, expect panic to set in and people to hoard fuel and prices to spike.
Strategic Reserves.
As discussed in New Zealand Energy Stock-take Part 3 - Refined Fuels, NZ is part of the International Energy Programme (IEP) through membership of the International Energy Agency (IEA).
We hold offshore oil stock tickets, which are a financial arrangement that gives us rights to crude oil held in other jurisdictions.
There are a number of concerns with this as previously discussed.
Designed in the aftermath of the 1970s oil shocks. Its underlying assumptions are that:
crude oil supply is the primary constraint,
refining capacity is available and operational,
shipping lanes remain open, and
member countries can convert oil stocks into usable fuel when required.
That framework made sense fifty years ago. Today, it is misaligned with reality.
The modern global fuel system is not just vulnerable to a lack of crude oil alone. It is also vulnerable to refining capacity constraints, particularly in middle distillates such as diesel and jet fuel. Many IEA member countries now have less refining capacity than they did when the programme was established, and several like New Zealand import virtually all of the refined products they rely on.
In other words, the IEP is an oil security mechanism in a refining-constrained world.
Emergency stock releases can put crude or products into the market, but they cannot conjure spare refinery capacity, create middle distillates from the wrong crude slate, or override domestic prioritisation in a prolonged crisis.
In 2026, where the international order increasingly looks to be based on the law of the jungle, the commitment of partner states to this program, when push comes to shove, leaves me with an uneasy feeling.
Shipping & Insurance
Even oil that does not transit through the Straits of Hormuz will become more expensive due to the shipping component of the supply chain.
This is due to war risk insurance premiums spiking, tanker disruptions cause rates to rise, voyages lengthen to avoid hot spots, and tanker availability tightens.
This will affect cargos coming to NZ almost immediately.
Time is key.
Energy security is not about whether we buy oil directly from the Middle East. It is about where we sit in the global hierarchy of demand.
New Zealand sits at the end of long supply chains. In times of abundance, that is invisible. In times of scarcity, it is a deciding factor.
A prolonged closure of Hormuz would not simply raise fuel prices. It would test the resilience of a just-in-time, fully imported fuel system in a small island economy.
We may not be at the centre of the world.
But we are fully exposed to it.
The Human Side of Conflict.
It is easy to simply focus on the analytics and forget the human suffering that is synonymous with these events.
On the ground in Iran people are suffering the devastating effects of war and upheaval that has been ongoing for far too long. This is the latest iteration in a decades-long series of events.
A dear friend of mine has family in Iran and I think of him daily as I see this unfolding. It is hard to imagine how this distressing this must be and my thoughts are with you all.
Larry
A timely reminder why NZ needs to wean off fossil fuels. Any significant reduction will make the contingency storage requirements easier to satisfy. Issues with supply happen every 10 years, almost like clockwork. Often it is a minor blip, but I wonder how many people remember the 1970's.
Electric vehicles and renewable electricity look real good at a time like this.