High oil prices due to the Iran war are pushing gasoline prices higher and that could lead to grocery bills rising for American consumers.
Oil prices surged in recent weeks after the outbreak of the Iran war, rising from the $60 to $70 a barrel range for most of February to more than $100 a barrel on Monday before gradually easing to about $85 a barrel during Tuesday’s trading session.
Higher oil prices, in turn, push gasoline and diesel prices higher, with the average price of a gallon of regular gasoline rising from $2.92 a month ago to $3.54 and diesel increasing from $3.66 to $4.78 in that period, according to AAA data.
The increase in oil, gas and diesel prices raises the transportation costs faced by businesses, including grocery stores, which may face pressure to raise the price of food and other items to account for the cost increases if the situation continues.
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“Every time something moves in the economy it will cost more,” said Derek Reisfield, co-founder of MarketWatch and a former McKinsey consultant. “Someone, usually the end consumer, will have to pay for that.”
Gregory Daco, chief economist at EY-Parthenon, told FOX Business, “For U.S. consumers, what this means is that while there is currently a price shock at the pump being felt directly by consumers, there’s still uncertainty as to how long this shock will last.”
“The effect on consumer spending activity is still somewhat fluid because we don’t know the duration of the shock to crude oil prices and in turn to gas prices,” he added, noting that gas prices will moderate if crude oil prices trend down toward their pre-war levels.
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Daco noted that businesses find themselves in “a very delicate pricing environment” because tariffs have raised input costs, which have been challenging to pass on to inflation-weary consumers.
“Pricing sensitivity over the course of the last couple of years has increased dramatically, and increasingly consumers are constrained by affordability issues,” Daco said.
Talent costs are also elevated with wages rising, and now transportation costs are increasing due to the oil and gas shock. And with consumers facing their own financial limitations, businesses are “really struggling in terms of your ability to find a relief valve on the pricing side.”
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Daco said businesses may opt to address those headwinds through some combination of margin compression and selective pricing behavior to “stave off some of these shocks at least in the short run” as they try to protect market share while waiting to see whether the energy price shock will be short-lived or longer-lasting.
Ben Fulton, CEO of WEBs Investments, said the oil shock “will have a butterfly effect if prices stay above $70 for very long. The cost to transport, hedging costs for manufacturing and cushioning by producers to protect from possible pending inflation will be noticeable to retail.”
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