Americans have so far mostly felt the effects of the US-Israel war against Iran in the form of rising prices at the gas pump, but the pain is about to spread as companies add fuel surcharges to their prices.
Iran’s effective closure of the Strait of Hormuz, a major route for a fifth of the world’s oil shipments, sent oil prices above the key $100 a barrel level. The surge in oil prices raised the U.S. average price for a gallon of regular gas by more than 50 cents to $3.45 earlier this week, according to Gas Buddy, which tracks pump prices nationwide. Crude oil typically accounts for about 50% to 60% of the price of a gallon of gasoline.
Experts said companies from different industries are following their own fees, the burden of which is likely to fall on consumers. Package delivery company UPS, shipping giant Maersk, chemical firm Ecolab and airlines Cathay Pacific and Air India have all announced fuel surcharges since the US and Israel launched attacks on Iran.
“We expect more such announcements until oil prices come down meaningfully from four-year highs,” Raymond James Investment Strategy analyst Pavel Molchanov said in an email.
How much are the surcharges and when will consumers see them?
The surcharges and when Americans are likely to see them vary by company.
Some like Air India are phasing them out immediately, with passengers traveling to the Middle East paying an extra $10 to their fares, those to Africa adding $30 to $90, and travelers to Southeast Asia, including Singapore, seeing a $20 increase. Surcharge will also be imposed on domestic flights.
On March 18, the next phase of Air India will start. Surcharges on European flights will increase from $25 to $125, while those on North American and Australian routes will increase from $50 to $200.
Other companies are implementing price increases immediately. Cathay Pacific will more than double its fuel surcharge on all ticketed flights from March 18. Ecolab is implementing a global 10-14% energy surcharge on all its products and services from April 1 for all businesses and countries.
Other companies, such as UPS and Maersk, update their surcharges weekly.
“To underscore, it’s not just transportation-related firms that are affected,” Molchanov said. “Oil is a major input for chemicals, and natural gas, which is also constrained, is used in many industrial processes.”
How long will the fuel surcharge last?
Whether companies will continue increasing their fuel surcharges or maintain them for an extended period depends on how long the closure of the Strait of Hormuz and strikes in the Middle East last, analysts said. The longer it takes for each, the greater the risk of long-term fuel overload.
In the near term, with Iran pledging to keep the Strait of Hormuz closed, “we should expect to see many more energy overloads this week and next week, as companies respond to their rising fuel costs,” Molchanov said.
However, trading in oil futures contracts – which are seen as a gauge of where investors expect oil prices to be over the course of a few months – suggests the market expects geopolitical tensions to ease by July, he said. Oil is seen cooling from $95 at the nearest April contract, to $86 by July, to $77 by October, and further down from there.
“This implies that the impact of inflation should be relatively brief,” Molchanov said. “In other words, it is unlikely to last as long as COVID-era inflation surges in 2022-23.”
Most economists agree. Deutsche Bank economist Jim Reed also said inflation expectations remain low. “Despite all the short-term noise in the markets, longer-term expectations still reflect market sentiment…confidence that this struggle is likely to prove temporary.”
The U.S., as a net producer rather than consumer of energy products, should also help consumers, said Jeff Schultz, head of economic and markets strategy at Clearbridge Investments.
“Higher oil prices paint a mixed picture for US economic growth, with consumption declines at least partially offset by rising job creation and profits in the energy sector,” he said in a note.
Will companies ever reduce prices again?
When oil prices fall again, companies will likely eliminate surcharges, Molchanov said. However, given the way oil futures contracts are growing in size, this may take some time.
“Once oil prices return to pre-war levels of around $60-70 per barrel, the energy surplus is likely to be phased out,” he said.
Medora Lee is the money, markets and personal finance reporter at USA TODAY. You can reach him at (email protected) and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday.
This article originally appeared on USA TODAY: Higher prices are here to stay. Companies increase surcharges amid turmoil in the Middle East
Reporting by Medora Lee, USA TODAY/USA TODAY
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