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Talk to an Expert| Category | Assignment | Subject | Economics |
|---|---|---|---|
| University | INTI International University (IIU) | Module Title | ECO 6201E Business Economics |
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High oil prices due to the Iran war weigh on everything from the petrol pump to consumer goods
Choking of Hormuz sends energy prices surging and everyday costs higher
NEW YORK: Pain at the pump. Flights canceled, costlier airplane ticket prices and baggage fees. Everyday items such as soap and toothpaste getting more expensive. Higher postal prices.
Consumers are paying for the Iran war ‘s disruption of global energy production as the conflict enters its third month. Steeper petrol, diesel and jet fuel prices are making driving and air travel more expensive. Many companies warn there’s more to come: the cost of fuel and of materials derived from petroleum could drive up prices for food and for household items.
Iran has closed the Strait of Hormuz to oil tankers, keeping them pent up in the Arabian Gulf and away from customers worldwide, while a US Navy blockade is preventing Iran from selling its own oil. Prices surged overnight on worries that the war will affect the flow of crude for a long time.
US petrol surges to highest level since 2022
As the cost of crude climbs, so do the prices of petrol (gasoline) and other fuel that keep equipment, cars, buses, delivery trucks and airplanes running. Across the U.S., gas prices are at their highest level since 2022. The national average hit $4.30 a gallon on Thursday, compared with $2.98 before the war started, according to AAA. That’s a 44% increase since the U.S. and Israel attacked Iran on Feb. 28.
Diesel prices are making shipping cost more
Steep diesel prices are making it more expensive to haul everyday goods. Diesel is now at an average of nearly $5.50 a gallon, up from $3.76 before the war, AAA says. Shippers have started adding surcharges to cover the cost. The U.S. Postal Service implemented a temporary 8% charge on some of its services, including Priority Mail, to help blunt the impact of rising transportation costs. Amazon added a 3.5% fuel and logistics surcharge on third-party sellers using its platform to offset fuel prices as well.
Shoppers may see more sticker shock for clothing, cosmetics, furniture and other goods.”Diesel’s the one that you want to watch out for for prices of consumer goods,” said Peter Zaleski, professor of economics at Villanova University.
Plane tickets are getting pricier
After jumping to $209 a barrel in early April, the global price of jet fuel eased last week to around $179, still well above the roughly $99 at the end of February. Fuel is one of the largest expenses for airlines. Its prices are pushing up airfares, baggage fees and add-on charges.
Major U.S. carriers including Delta, United, American and Southwest have raised checked baggage fees. United is expanding its “pay for what you want” model from economy to premium cabins, charging separately for options like seat selection. American is adding fees for seat assignments in basic economy, even for its elite-tier loyalty members.
Outside the U.S., carriers in Asia and Europe have added or raised fuel surcharges, in some cases tacking on hundreds of dollars to long-haul tickets.
Many airlines also have trimmed flight schedules, cut less profitable routes or reduced seat capacity. The Lufthansa Group has said it plans to cancel about 20,000 flights across its network over the next six months.
Consumer goods makers are raising prices
Procter & Gamble, the maker of such household products as Crest toothpaste, Tide detergent and Charmin toilet paper, warned last week the war would cause a $1 billion hit to profits during its next fiscal year. Many of P&G’s products and packaging are made of resin or other petroleum-based material, Andre Schulten, P&G’s chief financial officer, told reporters on April 24. He said the company may have to pass on some of the costs to shoppers.
London-based Unilever, which makes everything from Dove soap to Hellmann’s mayonnaise, plans to raise prices around 2% to 3% in “small doses,” CFO Srinivas Phatak said in an earnings call on Thursday. Groceries could be next. Grocery prices have yet to be affected, according to government figures. But they are expected to rise with tightening supplies of fuel and fertilizer.
Question 1
Using appropriate diagrams, analyse how the closure of the Strait of Hormuz affects the global oil market.
(Hint: You can use illustrations such as graphs to explain the situation)
(25 marks)
Question 2
Evaluate the price elasticity of demand for petrol and air travel in response to rising fuel prices.
(25 marks)
Question 3
Critically evaluate the role of government intervention in stabilising fuel prices. Should governments impose subsidies or reduce taxes on fuel? Analyse the impact on consumers, producers, and government budgets.
(25 marks)
Question 4
Malaysia has been actively promoting the adoption of electric vehicles (EVs) through various policy initiatives and incentives. To what extent can the increased adoption of EVs mitigate the economic impact of rising petrol prices in Malaysia? Discuss using relevant economic concepts.
(25 marks)
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