Oil prices have slipped on Monday, but there is little reason for retailers, suppliers or consumers to assume that the pressure on fuel and food prices is over. The market is waiting for the United States to announce a new package of sanctions against Iran, while shipping through the Strait of Hormuz remains severely restricted. Brent crude was trading around $93 a barrel and US crude around $85, following a rise of more than 5% during the previous week. The immediate fall is largely a result of investors taking profits rather than evidence that the underlying supply problem has disappeared.
For the supermarket industry, the Strait of Hormuz is becoming an increasingly important issue because the consequences extend well beyond the price of crude oil. The waterway is a critical route for energy shipments, and the sharp reduction in shipping traffic is already putting pressure on refined fuel markets. Diesel is particularly important to food retail because it powers a large proportion of the trucks, distribution fleets and commercial vehicles responsible for moving food from farms and manufacturers into supermarket distribution centres and stores. If refined fuel becomes more expensive or harder to obtain, the additional cost eventually has to be absorbed somewhere in the supply chain.
The effect on petrol prices at the pump can therefore be quicker than the effect on supermarket prices. Petrol stations do not normally pass every movement in the crude market directly to motorists, but prolonged increases in wholesale fuel costs eventually feed through to retail forecourts. The current situation is particularly sensitive because fuel markets are already dealing with disrupted supplies and higher refining costs. A further tightening of oil exports or a prolonged reduction in shipping through Hormuz could therefore push petrol and diesel prices higher even if crude prices move only gradually.
For supermarkets, diesel may be an even bigger concern than petrol. Food distribution depends heavily on road transport, and diesel is used throughout the logistics chain, from agricultural machinery and food processing to long-distance haulage and local deliveries. A higher diesel price increases the cost of every journey, meaning that a manufacturer delivering products to a distribution centre, a wholesaler transporting goods to a supermarket and a retailer replenishing stores can all face additional costs.
The impact does not stop with transport. Energy is embedded in almost every stage of food production. Farmers need fuel for tractors and harvesting equipment, food manufacturers require electricity and gas for processing, refrigeration and cooking, while warehouses and supermarkets need substantial amounts of energy to keep chilled and frozen products at the correct temperatures. Packaging production is also energy intensive, meaning that an oil and gas shock can eventually affect the cost of everything from plastic packaging to cardboard and glass.
One of the less obvious risks for food prices is fertiliser. Natural gas is a major input into the production of nitrogen fertiliser, while the Gulf region is an important source of fertiliser exports. Any prolonged disruption to energy markets can therefore increase agricultural costs well before consumers see the effect in the supermarket. Higher fertiliser prices can feed into the cost of growing cereals, vegetables and animal feed, creating another layer of inflation further down the food chain.
This creates a difficult situation for supermarket executives. Consumers are already extremely sensitive to food prices, and retailers have spent considerable effort keeping key products affordable. Passing every increase in transport, energy, packaging and agricultural costs directly to shoppers could damage customer loyalty, particularly in markets where discounters are aggressively competing on price. Absorbing all the additional costs, however, would put further pressure on already tight retail margins.
The important distinction is between a short-lived oil-price movement and a prolonged energy shock. If the situation around Iran and the Strait of Hormuz improves, oil prices could fall rapidly and some of the pressure on fuel and transport costs would disappear. Supermarkets and suppliers would then have an opportunity to avoid passing temporary increases further down the supply chain. If shipping remains restricted for weeks or months, however, the situation becomes much more serious because companies would have to start planning around structurally higher costs rather than treating the increases as temporary volatility.
There is also a psychological effect. When consumers see petrol prices rising, they often become more cautious about household spending. A driver paying more to fill the car has less disposable income available for restaurants, clothing, household goods and other purchases. For supermarkets, this can have two opposing effects: grocery spending may remain relatively resilient because food is essential, but shoppers may become increasingly focused on promotions, private-label products and cheaper alternatives.
That could intensify the battle between supermarket brands and discounters. Consumers who previously bought branded products may move towards private label, while households already buying private label may trade down further. Retailers with strong purchasing power and sophisticated supply chains will be better positioned to negotiate with suppliers and protect prices, while smaller operators could find it harder to absorb rising logistics and energy costs.
The immediate fall in crude prices should therefore not be interpreted as a return to normality. The market is waiting to see how far the new US sanctions go, how Iran responds and whether shipping through the Strait of Hormuz can return to normal levels. With global energy markets already under pressure, the next few weeks could determine whether the current disruption remains primarily an oil-market story or becomes another inflation problem for supermarkets and consumers.
For the food retail industry, the warning is clear: the price of oil may be decided in the energy market, but its consequences can eventually be felt at the petrol station, in the distribution centre and on the supermarket shelf. If fuel, fertiliser, transport and energy costs continue rising together, retailers may once again find themselves caught between protecting consumers from higher prices and protecting the financial health of their businesses.