International oil prices surge, revealing the "butterfly effect"

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Source: Beijing Business Today

As volatility in the global energy market intensifies, the impact is already spreading beyond the oil prices that have surged in countries around the world. The rapid increase in transportation costs is quickly making its way to the consumer end. Faced with wild swings in fuel prices, governments worldwide are trying to roll out measures to ease the shock of runaway oil prices on ordinary people’s lives. However, the world is paying increasingly steep costs to protect its economy from the most severe energy shock in decades. Countries’ oil-price subsidies are bearing the brunt of the massive fiscal burden on governments.

Costs pass through to the consumer end

Amid the impact of the situation in the Middle East, oil prices have continued to trade at high levels, with persistent fluctuations. Its ripple effects are gradually seeping into every layer of everyday life. Amazon has recently confirmed to the media that, starting on April 17, it will temporarily impose a 3.5% fuel and logistics surcharge on third-party sellers using its platform. It is understood that Amazon’s fuel and logistics surcharges will apply to U.S. and Canadian sellers using its “Amazon Logistics” service. Starting May 2, the surcharge will also apply to sellers using the “Prime Shopping” and “Multi-Channel Delivery” services.

In an email statement, Amazon said, “Rising fuel and logistics costs have already driven up the operating costs across the entire industry.” Amazon said that, so far, it has been absorbing these costs on its own, but similar to other major carriers, when costs remain high for an extended period, the company will implement temporary surcharges to offset some of these expenses. The company also noted that this charge is “clearly lower than” the surcharges collected by other major carriers.

It is understood that more than 60% of products on the Amazon platform come from independent sellers, who must pay Amazon sales commissions and warehousing and fulfillment fees. Analysts point out that, because sellers’ profit margins are limited, this incremental cost will very likely end up translating into higher product prices, paid for ultimately by end consumers.

“Alright—before the selling price goes up, the costs first go up.” A seller lamented. “The 3.5% surcharge really makes life difficult for a lot of sellers. They say it’s a temporary surcharge, but chances are once it goes up, it won’t come back down again. For low average order value and low-margin products, the extra 3.5% cost could significantly squeeze profit margins.”

It’s not just Amazon—more and more carriers are starting to levy surcharges to make up for continuously rising energy costs. United Parcel Service (UPS) and FedEx have already increased their fuel surcharges. The U.S. Postal Service announced last week that it will impose an 8% fuel surcharge on packages shipped starting April 26, and said the measure will continue until January 17, 2027.

In addition, United Airlines has also officially announced that, affected by persistently rising fuel prices, it will increase the checked baggage fees for domestic U.S. routes and some international routes. Starting April 3, for passengers traveling on United Airlines to and within the U.S., Mexico, Canada, and Latin America, the fees for their first and second checked bags will increase by a total of $10 across the board.

Jiang Han, a senior researcher at the Pangu Think Tank, said that, based on the cost pass-through mechanism, this round of price increases is directly related to the rise in oil prices. Road freight, air freight, and the express delivery industry share the same fuel cost structure. When oil prices rise, transportation costs will be driven up directly.

Multinational responses to high oil prices

In addition to transportation and household energy spending, the impact of high oil prices is further spreading to food and manufacturing. Rising natural gas prices will increase fertilizer costs, which in turn will raise food prices. Meanwhile, many countries in Asia and Africa are highly dependent on Gulf crude oil imports; these energy costs will ultimately be reflected in the prices of exported goods, logistics fees, and prices of everyday consumer goods.

Analysis reported by the British Broadcasting Corporation (BBC) indicates that for every $10 increase in international oil prices, gasoline prices typically filter through to retail endpoints in about two weeks. At the same time, natural gas prices are also climbing, and household energy bills, food prices, and manufacturing costs could face additional pressure.

In Asian countries that are highly dependent on Middle East energy supply, efforts to save fuel and implement driving restrictions are being continuously upgraded. In the Philippines, diesel prices have recently risen more than 2-fold compared with the end of February, and liquefied petroleum gas prices have risen in sync. Restaurants and street vendors that rely on liquefied petroleum gas say their costs keep increasing, and they are very worried that one day they may be unable to make ends meet.

In another case, citizens in Japan and South Korea—also Asian countries and heavily dependent on Middle East crude oil—have also felt the shock of the “Middle East premium.” A taxi driver in Japan said that rising fuel prices are especially difficult to deal with. Recently, the South Korean government officially implemented a “petroleum price cap” system, marking the first time in nearly 30 years that the South Korean government has introduced such a system. The plan shows that the government sets a price cap on petroleum products supplied by refineries to gas stations and distributors, and adjusts it every two weeks based on movements in international oil prices.

In fact, even Europe and the United States were not spared, facing shocks such as a sharp surge in travel costs driven by skyrocketing oil prices. In the UK, gasoline prices have risen to a 18-month high. The government said that if it finds that gas stations are taking advantage of the situation to reap excessive profits, it is prepared to take intervention measures. To address pressure on energy spending for low-income households that rely on fuel oil for heating, the UK has opened a support program with a total of 53 million pounds sterling to ease the strain.

Rising fiscal burdens

However, the world is paying increasingly steep costs to protect its economy from the most severe energy shock in decades. Countries’ subsidies for oil prices impose a huge fiscal burden on governments, and it is the first to be hit. As of 2024, global public debt has risen from $9.7 trillion in 2023 to $10.2 trillion. The International Monetary Fund warns that delaying necessary domestic price adjustments may relieve public pressure in the short term, but could damage fiscal revenues and increase inflation and exchange-rate risks.

Dong Zhongyun, chief economist at CICC Securities, analyzed that oil price intervention measures usually create pressure for fiscal policy, but the form of the pressure and the transmission path differ significantly depending on the policy tools used. Direct subsidies and tax cuts constitute fiscal interventions and directly reduce fiscal revenue; purely price controls are administrative interventions—on the surface, they do not directly produce fiscal spending, but they may trigger negative consequences such as supply shortages, cross-border arbitrage, and distortions in market structure.

“Countries with high dependence on energy from abroad and relatively high fiscal pressure of their own may have particularly prominent deficit pressure, especially Japan, South Korea, and India.” Mingming, chief economist at CITIC Securities, said. “As an energy power, the U.S. is relatively less affected by the conflict between Iran and the U.S. than Asia or Europe, but rising crude oil prices will still push up price pressures in the U.S., such as gasoline, thereby delaying expectations of Fed rate cuts, raising U.S. Treasury yields, and further increasing the U.S.’s fiscal deficit pressure.”

At present, it appears that debt in developing countries is generally considered more fragile. Mingming explained that this conflict between Iran and the U.S. creates a greater energy shock for Asian countries. Combined with rising uncertainty in the global trade environment, developing countries with high energy dependence and high fiscal deficit pressure and high external debt repayment pressure are expected to suffer negative shocks earlier and more severely in this round of conflict. At the same time, the escalation of geopolitical conflict has led to a decline in global risk appetite, driving the U.S. dollar rebound and capital outflows from developing countries; this also can cause debt risk problems for some developing countries brought on by exchange-rate depreciation, as well as imported inflation pressure.

Beijing Business Today reporter Zhao Tianshu

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