Why has your KiwiSaver bounced back even as the oil shock deepens? – Inside Economics

I know markets are often irrational, but the current disconnect seems to be taking that to extremes. What’s behind the apparent lack of concern?

Is it because investors are so obsessed with the (possible) future profits to be made from artificial intelligence, that they don’t have time to think about what’s happening right now?

Is it because the US economy is suffering less than other countries?

Or do investors really believe the war will soon be over, the Strait of Hormuz will reopen, and we’ll all live happily ever after?

Mark F.

A: Thanks Mark … I agree it’s starting to look a bit unhinged.

Although my KiwiSaver account is looking good again, so I’m not complaining.

We hear a lot about the artificial intelligence (AI) mania inflating Wall Street indices. That’s not really been the case this year.

The big tech stocks (the Magnificent Seven of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) make up more than 33% of the S&P 500’s market capitalisation.

So investor enthusiasm for the AI revolution (and future earnings) does have the potential to detach market performance from the real economy.

But I was surprised to find that if you take the Magnificent Seven out of the S&P500 performance this year, things still look pretty good.

There is an equal-weight S&P 500 exchange-traded fund (ETF) that just gives each of the 500 companies the same 0.2% weighting, regardless of size, so the giants have no more influence than anyone else.

It is currently running 5% ahead of the market cap-weighted index.

So if it’s not the tech bubble, what is it?

Fund manager and professor (and YouTube star) Patrick Boyle had a good take.

“Equity traders seem to have decided that a war in the Middle East, one that has effectively closed the world’s most critical energy choke point, is simply a great opportunity to buy the dip,” he said.

“And buying the dip has become such a winning strategy in recent years that dips don’t really happen much anymore.”

So, it’s a bit like Auckland’s traffic woes. As anyone trying to get out of town for a long weekend will tell you, you can try to avoid rush hours by travelling off-peak, but so many people are doing the same thing as you that all that happens is that rush hours are extended.

Another point that I’ve raised before: markets tend to get bored with waiting for geopolitical events to play out.

The initial shock gets priced in quickly. Hypothetically, it factors in worst-case scenarios.

Traditionally, the worst case for Wall Street would be a marked slowdown in US economic growth or a recession. That would mean US consumers buying less of the goods and services made and offered by Wall Street companies.

However, it seems Wall Street is increasingly detached from that kind of bricks-and-mortar slump.

More concerning might be higher inflation, driving interest rates higher.

That shifts investor appetite away from equities and toward fixed interest products like bonds or savings accounts.

Wall Street traditionally responds quite dramatically to US Federal Reserve rate hikes, or even talk of them.

Before the war, the Fed was on a path of reducing rates. So far, the inflation risk has simply seen it put rate cuts on hold.

Wall Street investors seem prepared to wait and see on this one – despite no shortage of economists warning of what lies ahead.

I suspect that if and when it happens, the reaction will be a last-minute type of thing.

But we’ll see.

Wall Street may well soar through all of this turmoil this year, only to crash on some obscure and previously unimaginable trigger that no one predicted.

Such is the ever-perfect efficiency and rationality of the stock market.

Oil issues

Q: Hi Liam,

I always enjoy your columns and have a couple of questions.

There are lots of mentions that only 20% of the world’s oil production comes through the Strait of Hormuz.

My understanding is that Opec has production quotas, so my question is why production cannot be increased by other producers to make up the shortfall, or are they happy to profit from higher prices? I saw a report that one of the major oil companies’ profits were, I think, double what they were before the war.

Is the tax on fuel in New Zealand a set amount per litre or is it a percentage of the cost? If the latter, the amount collected obviously increases with price.

Grant Watson

A: Hi Grant. Yes, I also noticed that BP reported a bumper profit in the first quarter as crude oil prices soared.

The company did a lot better than double what it did last year, reporting US$3.8 billion ($6.4b) compared to US$687 million in the same quarter of 2025.

AFP reported that underlying profit more than doubled to US$3.2b from US$1.4b the previous year, a figure that BP said reflected “exceptional oil trading contribution”.

That might go some way to explaining why oil producers rushed to increase supply and fill the gap.

I would note that Opec+, the group of major oil-producing nations, has increased its output limits slightly in response to the crisis.

But that is largely symbolic, as most of these nations still need to ship through the Strait of Hormuz.

The obvious solution would be for US producers to ramp production. The US is actually the world’s largest oil producer and if it were to lift its output by 10 or 20%, it would go a long way to easing the crisis.

In fact, US President Donald Trump has called on US producers to lift supply and US oil exports have hit new records this year.

The problem is that extra US production comes from shale oil, which is expensive to extract. The oil price needs to be above US$65 a barrel to make it profitable.

Before the Iran war, there was an oil oversupply and it was regularly trading below that.

US President Donald Trump has called on US producers to lift supply and US oil exports have hit new records this year. Photo / Getty Images

As it takes months to ramp up shale oil production, there are understandable industry concerns that the Strait of Hormuz may open sooner and oil prices may collapse.

They’ve largely ignored calls from Trump to get pumping, but there are talks that his Administration might loosen regulations to make it easier and quicker for shale oil producers to get going.

In time, if the impasse in the Strait of Hormuz is not resolved, I’m sure we would see increased US shale production filling some of the gap.

Hopefully, we don’t have to wait that long.

Taxing question

Finally, your question about fuel tax is an interesting one. Fuel tax excluding GST is a fixed cost of cents per litre (currently about 77c on a litre of 91). So the Government’s revenue doesn’t rise with fuel prices.

In fact, if higher prices destroy demand, it may fall.

It has been suggested that the Government profits from higher fuel prices because the 15% GST component of it rises.

That is true if we look at fuel in isolation.

But it’s likely that higher fuel prices will reduce spending elsewhere.

Most people will keep driving because they have to; if they are really feeling the squeeze on their weekly budget, they’ll cut back in other more discretionary areas … like eating out, travel and other entertainment.

So in aggregate, the total tax take from GST will balance out, or – if people save more because they are worried about the uncertainty – it may even fall.

Many economists are forecasting that the fuel shock will cause contraction of the economy in the short term, although they remain hopeful that will be limited to just the current second quarter (ie no recession).

Ageing OCR

Q: Hi Liam, I’m just a layman, but lately I have been wondering why the Reserve Bank relies so heavily on the Official Cash Rate as an inflation-fighting tool.

As I understand it, only around 28% of households have a mortgage, so when interest rates are lifted to take money out of householders’ pockets and suppress demand to lower inflation, that 28% of the community gets very heavily punished, while the other 70+% have a much easier time of it.

It also means the time taken to get an economic result is longer (ie longer and deeper pain for families with mortgages).

And slightly perversely, bank deposit rates for those with investments actually improve, giving them more to spend.

Yes, I realise a lot of landlords will have mortgages too, so renters’ spending may well also be restricted because of increases.

But not all landlords will push rents up immediately, or as far – some landlords are structured a bit better to absorb ups and downs, and some cannot because of market forces, so I’d wager not all of the interest rate moves hit every tenant as immediately, or as hard, as happens with mortgage-holders.

In any case, at least 40-50% of households are pretty much off the hook when the Reserve Bank increases rates, and that percentage could well be growing as the population ages.

Surely the Reserve Bank needs a more sophisticated set of tools than just the old blunt-axe OCR going forward? Seems to me the OCR has just about had its day.

Keith Smith

A: Thanks, Keith, this question follows the discussion in the past couple of weeks about the way the Official Cash Rate (OCR) works to restrict or loosen the money supply.

It raises an issue that I think will start to become more serious in the next couple of decades, although for now, I still think the OCR is the best tool we have to fight inflation and keep the economy stable.

Because the OCR works primarily through pricing signals rather than through directly squeezing bank liquidity, its effectiveness depends on how responsive borrowers and the broader economy are to those price signals.

So that’s where the demographics become problematic.

Hypothetically, an economy full of debt-free home owners would render the OCR much less effective.

They would simply be much less influenced by interest rate changes.

But there would still be areas where it did work ie business investment and credit creation.

Businesses borrow regardless of whether they own property and the cost of capital affects investment decisions across the whole economy.

So, in a more realistic scenario – where the base of mortgage holders keeps falling but is still significant, the OCR would remain functional – even if its power is reduced or slowed down.

The bigger question then might be the extent to which we are prepared to put the burden on an ever smaller portion of our younger mortgage-holding public.

Unemployment update

First-quarter Labour Market data from Stats NZ lands today at 10.45am.

The official unemployment rate is expected to hold steady at 5.4% or rise slightly to 5.5%.

Either way, the topline figure won’t tell us too much.

Economists will be looking for trends below the headlines.

It’s expected that the economy saw some employment growth, but that the size of the labour force grew by enough to offset that improvement.

Wage data will be pretty crucial for the Reserve Bank as it looks for signs of anything that might push inflation up.

I took a deeper dive into the topic on the Herald’s The Front Page podcast with Chelsea Daniels.

The Economy of Everything

Speaking of podcasts! This week, Herald business editor Tamsyn Parker and I launch our new podcast – The Economy of Everything.

From markets and investing to employment rates, cost of living, policy changes and Reserve Bank decisions, we’ll try to make sense of what’s driving the economy right now. The style is conversational and light and fun. At least I hope it is … check us out in the link below.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.