Higher Prices Are Here. Companies Add Surcharges Amid Mideast Turmoil

Americans have so far mostly felt the impacts of the U.S.-Israel war against Iran in price increases at the gas pump, but that pain is about to spread as companies add fuel surcharges to their prices.

Iran’s effective closure of the Strait of Hormuz, a key passageway for a fifth of the world’s oil shipments, spiked oil prices past the key $100 per barrel level. The jump in oil prices boosted the U.S. average price for a gallon of regular gas by more than 50 cents earlier this week to $3.45, according to Gas Buddy, which tracks nationwide pump prices. Crude oil typically accounts for roughly 50% to 60% of the cost of a gallon of gasoline.

Companies across industries are following up with their own fees that will likely dribble down to consumers, experts said. Package delivery company UPS, shipping giant Maersk, chemicals firm Ecolab and airlines Cathay Pacific and Air India have all announced fuel surcharges since the U.S. and Israel launched attacks on Iran.

“We expect more such announcements until oil prices cool 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 in immediately, with passengers travelling to West Asia paying an extra $10 on their fares, to Africa adding $30 to $90, and those to Southeast Asia, including Singapore, will see a $20 hike. Domestic flights will also get surcharged.

On March 18, Air India’s next phase kicks in. Surcharges on European flights will rise by $25 to $125, while North American and Australian routes will increase by $50 to $200.

Other companies are implementing price increases across the board right away. Cathay Pacific will more than double its fuel surcharges on all flights ticketed from March 18. Ecolab is implementing a global 10-14% energy surcharge on all its products and services, effective April 1, for all businesses and countries.

Other firms, like UPS and Maersk, update their surcharges weekly.

“To underscore, it’s not just transport-related firms that are affected,” Molchanov said. “Oil is a key input for chemicals, and natural gas, which is also disrupted, is used in many industrial processes.”

How long will fuel surcharges last?

Whether companies continue to increase their fuel surcharges or keep them over 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 larger the risk of even higher fuel surcharges for a longer time.

In the near term, with Iran vowing to keep the Strait of Hormuz shut, “we should expect to see many more energy surcharges being unveiled this week and into next, as companies respond to their rising fuel costs,” Molchanov said.

However, trading in oil futures contracts − seen as a gauge of where investors expect oil prices to be during certain months – shows markets expect geopolitical tensions to ease by July, he said. Oil is seen cooling from $95 in the closest April contract, to $86 by July, $77 by October, and further down from there.

“This implies that the inflationary impact should be relatively brief,” Molchanov said. “In other words, it’s unlikely to be anywhere near as prolonged as the COVID-era inflationary increase in 2022-23.”

Most economists agree. Deutsche Bank economist Jim Reid also noted inflation expectations remain subdued. “Despite all the short-term noise in markets, longer-term expectations still reflect the market’s… belief that this conflict is likely to prove temporary.”

The U.S. as a net producer, rather than consumer, of energy products should also help consumers, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

“Higher oil prices present a mixed picture for U.S. economic growth, with a drag to consumption being at least partially offset by the benefits from increased job creation and profits in the energy sector,” he said in a note.

Will companies ever lower prices again?

When oil prices drop again, companies will likely eliminate the surcharges, Molchanov said. However, the way oil futures contracts are sizing up, it may be a while.

“Once oil prices are back to pre-war levels of around $60-70 per barrel, energy surcharges are likely to be phased out,” he said.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.

This article originally appeared on USA TODAY: Higher prices are here. Companies add surcharges amid Mideast turmoil

Reporting by Medora Lee, USA TODAY / USA TODAY

USA TODAY Network via Reuters Connect