The surge in fuel prices is working its way through the economy

The pressure of higher fuel costs is already being felt by businesses, but most of the impact is still working its way through the economy. The knock-on effects of higher fuel costs on freight, food, aviation, and retail pricing are expected to unfold over the coming weeks rather than show up all at once, CIO at Century Financial Vijay Valecha told EnterpriseAM UAE.

REMEMBER- This month, UAE fuel prices rose sharply, with diesel rising 70% and petrol around 30%, in line with global spikes in oil and gas prices.

Diesel’s sharp hike has already increased the cost of moving goods, causing rises in freight rates and delivery pricing, which is where the impact tends to surface first, Valecha added. Couple that with shipping disruptions, which are also raising the cost of moving fuel and goods, adding to ins. and transport expenses — and the pressure has definitely started hitting supply chains, even if it has not fully reached consumers yet.

Transport and logistics are the first pressure points. “Certain transportation and logistics providers have already rolled out fuel surcharges, while industrial companies, including those exposed to petrochemicals and packaging, are also raising prices,” Valecha added.

Sectors like transport, logistics, construction, and delivery services are particularly exposed, as fuel makes up a large share of their operating costs, head of trading (MENA) at Saxo Bank Hamza Dweik told EnterpriseAM UAE. Fuel-intensive sectors — which also include retail — can see fuel account for 20-40% of operating costs, Dweik noted. Deliveroo declined to comment on the impact of higher fuel prices on its operations, while EnterpriseAM was unable to reach other players like Talabat or noon ahead of publishing.

Retail and food are next in line, especially with food being exposed due to the UAE’s reliance on imports. Supermarkets are facing higher delivery and packaging costs, while global increases in fertilizer and transport are feeding into food prices, though with a lag, Valecha added.

A lot of businesses are still absorbing part of the increase to remain competitive, but that’s unlikely to hold if costs remain elevated, especially for those in food distribution and logistics, Dweik said. One premium butchery shop, which relies on imported meat, told us earlier that their firm has been absorbing rising costs so far despite rising shipping costs.

Hotels and restaurants, meanwhile, are dealing with rising input and logistics costs alongside a sharp drop in tourist arrivals, putting their margins under extreme pressure.

For them, it’s a conundrum of needing to slash prices to attract more visitors, but facing piling costs from food, transport, and raw materials. That probably explains why many hotels have chosen to shutter their doors for now, using the downtime to both cut costs and focus on refurbishment, renovation, and maintenance. That includes Burj Al Arab, Park Hyatt, and others.

Atlantis has also just yesterday said it would temporarily suspend operations across seven dining venues, saying it will “review guest demand and refine its dining strategy” and announce reopening accordingly, Khaleej Times reports, citing a statement.

So where will you, as a consumer, feel the pain first?

This is unfolding as a staggered cost-push cycle. Fuel feeds directly into transport and utilities, which together account for roughly 10% of the consumer basket, Valecha added. The broader macro effect is likely to remain contained in the near term, but Valecha warned that prolonged pressure can lead to second-round effects as higher transport and logistics costs gradually filter through to consumers.

Households are likely to feel it first through higher commuting costs and then through rising prices of goods and services, Valecha said. Airlines are also facing higher jet fuel costs, which are expected to feed into ticket prices over time, Valecha said.

How long might this last? It depends on the outcome of the war. This could be a short-lived sting given that the UAE is well positioned to manage fuel volatility, but prolonged disruption could lead to persistent cost-of-living pressure, Dweik added.

Even if conditions stabilize, it may take time for supply chains to normalize and for pricing pressure to ease, Valecha said. Fuel price volatility is likely to remain part of the operating environment rather than a temporary disruption, Dweik added.

What to watch: Fuel prices for next month will be announced next week, and both analysts expect prices to remain elevated in the near term amid ongoing global volatility. Brent crude is currently hovering below the USD 100 mark, after hitting nearly USD 120 earlier during the conflict.

How does pricing even work?

“Most of April’s price increase came from the upstream shock, but the sharper rise in diesel and petrol was driven by downstream stress,” Valecha explained. “Crude oil sets the base for prices, but the industrial fuels market is seeing a shortage in fuel supplies for a number of reasons, including limited refining capacity, tight inventory levels of products, and delays in logistics that have magnified the severity of each shortage,” he added.

With parts of the regional refining system offline and shipping constrained, the downstream chain compressed much faster than crude supply, he noted.

That means that despite the ceasefire helping oil prices ease slightly, we’re unlikely to see prices go down to pre-war levels for a while.