Global energy costs rise as Iran war disrupts oil and lifts pump prices

Summary

The Iran war’s impact on global energy production is starting to show up in day-to-day spending, with higher fuel costs rippling through transportation and the supply chain for goods. The Associated Press reported that consumers are seeing pain at the gas pump, higher delivery and shipping costs, and rising air travel expenses as the conflict enters its third month.

Fuel is also shaping how companies and carriers adjust fees, schedules and pricing plans. The Associated Press report said companies are warning that the cost of fuel and of petroleum-derived materials could drive up prices for food and household items, depending on how long the disruption lasts.

Oil prices have climbed as the conflict disrupts supplies of crude, and the reported mechanics are key to understanding why retail costs can change quickly. The Associated Press said Iran has closed the Strait of Hormuz to oil tankers and that a U.S. Navy blockade is preventing Iran from selling its own oil, leaving tankers pent up in the Persian Gulf and crude supply constrained for customers worldwide.

In the United States, the report highlighted what that means for consumers at the pump. AAA said the national average gas price hit $4.30 a gallon on Thursday, up from $2.98 before the U.S. and Israel attacked Iran on Feb. 28—an increase of 44% since the war began. MSI previously reported that higher oil prices were flowing through to gasoline costs as the conflict dragged on, including developments linked to Hormuz-access concerns. MSI previously reported.

Diesel, which affects trucking and shipping costs, is also rising. AAA said diesel is averaging nearly $5.50 a gallon, up from $3.76 before the war. The Associated Press report said shippers have started adding surcharges to cover higher fuel costs, and that the U.S. Postal Service implemented a temporary 8% charge on some services, including Priority Mail, while Amazon added a 3.5% fuel and logistics surcharge on third-party sellers using its platform.

Those transportation costs can flow into consumer prices beyond fuel itself. The Associated Press reported that shoppers could see additional sticker shock on goods such as clothing, cosmetics, furniture and other items, as higher costs for fuel and petroleum-linked inputs influence prices set by companies and retailers.

Air travel is another area where fuel costs are showing up quickly. The Associated Press report said jet fuel jumped after early April highs, reaching around $179 last week—still above the roughly $99 at the end of February—after moving up to $209 a barrel in early April. Because fuel is a large airline expense, the report said it is pushing up airfares and baggage fees and prompting add-on charges.

The Associated Press said major U.S. carriers including Delta, United, American and Southwest have raised checked baggage fees and adjusted how customers pay for services. It reported that United is expanding its “pay for what you want” model from economy to premium cabins, charging separately for options such as seat selection, and that American is adding fees for seat assignments in basic economy, even for elite loyalty members. Outside the U.S., the report said carriers in Asia and Europe have added or raised fuel surcharges, in some cases charging hundreds of dollars on long-haul tickets.

The report also pointed to capacity and schedule changes as airlines react to higher costs. It said Lufthansa Group has said it plans to cancel about 20,000 flights across its network over the next six months, and that other carriers have trimmed flight schedules, cut less profitable routes or reduced seat capacity.

Manufacturers of consumer goods are likewise facing pressure from petroleum-linked inputs and packaging. The Associated Press reported that Procter & Gamble estimated the war could cause a $1 billion hit to profits during its next fiscal year if Brent crude stays around $100 a barrel, adding that many of its products and packaging rely on resin and other petroleum-based materials. The Associated Press also reported that Unilever plans to raise prices around 2% to 3% in “small doses,” according to its CFO, Srinivas Phatak.

Food price pressures may come later, depending on how energy costs and fertilizer costs move through agriculture and retail. The Associated Press reported that grocery prices have yet to be affected according to government figures, but are expected to rise as supplies tighten for fuel and fertilizer. It cited an estimate that fuel accounts for roughly 15% to 30% of the total cost of food, and it noted that about 30% of the world’s fertilizer shipments typically pass through the Strait of Hormuz.

Agricultural economists in the report suggested that energy shocks do not translate into retail food prices instantly. Ken Foster of Purdue University said there is typically a 3- to 6-month lag between an energy price shock and an increase in retail food prices, with packaged foods sometimes seeing a delay of up to a year because of shelf life.

Beyond consumer prices in wealthy countries, the Associated Press report raised risks tied to hunger in lower-income regions. It cited a World Food Program estimate that 45 million additional people—most in Asia and Africa—could tip into hunger if the war does not ease by midyear, which would bring the total number of people facing food insecurity to 363 million, the highest level on record.

Corinne Fleischer, the supply chain director for the World Food Program, said in a statement that “Delays and higher transport costs push up food prices, and families who spend 50% to 70% of their income on food are the first to go without,” according to the Associated Press report.